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Will Cost Saving Initiatives Drive Hershey Company (HSY)?
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On Dec 6, 2016, we issued an updated research report on global confectionery leader The Hershey Company (HSY - Free Report) .
Hershey’s shares have gained around 9.66% year to date, compared to the 3.6% decline of the Zacks categorized Food-Confectionary industry. Estimates have also moved north for 2016 and 2017. Also, Hershey beat earnings estimates in all of the past three quarters. The company’s productivity improvements and cost savings initiatives should drive the stock’s performance in the upcoming quarters as well.
Pros
Hershey is the largest producer of quality chocolate products in the U.S. It markets some of the world’s leading brands which enjoy widespread consumer acceptance. The company is also a global leader in sugar confectionery products, which is an attractive category as confectionery products are easily available, affordable and highly indulgent, thus making the industry almost recession-resistant. The $25 billion CMG category is the largest segment of the $85 billion U.S. snacks market.
In order to counter tepid sales, management has optimized its North American manufacturing footprint, added manufacturing capabilities in international markets, increased supply chain productivity, invested in cost saving projects and improved the sales mix significantly under its continuous improvement and productivity (CIP) program. In 2016, the company expects to achieve combined (CIP and business productivity initiative) savings of around $135 million.
In its last reported third quarter, earnings rose 10.3% on lower advertising costs and higher sales in North America. Hershey also raised its earnings guidance for 2016. The company’s sales were up 2%, the second straight quarter of a rise after four quarters of no growth. Its North America category improved while the International segment saw profits for the first time since fourth-quarter 2014. Volumes also increased after almost two years.
Cons
Although, Hershey has been registering sales growth in recent times, its sales trends have been weak since 2014 due to weak category trends, increased competition from broader snacking category and soft international growth. The top-line weakness continued in 2016 with sales declining 0.1% in the first nine months of 2016. Persistent macroeconomic challenges in China continues to hurt the company’s sales.
Gross margin also remains a drag and the company continues to expect 2016 gross margin to be slightly below 2015 levels, mainly due to unfavorable sales mix.
Moreover, the U.S. chocolate category is gradually slowing down. A shift in consumer preference toward healthier snacks like nuts and increased competition from the broader snacking category is denting the demand for chocolate.
Meanwhile, changing shopping habits in the U.S., like channel shifting and e-Commerce, are hurting chocolate category growth. Over the last three years, the average growth rate of the CMG category was about 2.3%, lower than the long-term historical average of 3% to 4%. In fact, the company is witnessing chocolate category softness in key international markets like China as well.
Zacks Rank & Other Key Picks
Hershey currently carries a Zacks Rank #2 (Buy).
Other favorably ranked stocks in the industry include Mondelez International, Inc. (MDLZ - Free Report) , Ingredion Inc. (INGR - Free Report) and Lancaster Colony Corp. (LANC - Free Report) .
Full-year 2016 earnings for Mondelez are expected to grow 11.4%.
Ingredion is expected to witness 20.1% growth in full-year 2016 earnings.
Fiscal 2016 earnings for Lancaster are expected to rise 7.3%.
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Will Cost Saving Initiatives Drive Hershey Company (HSY)?
On Dec 6, 2016, we issued an updated research report on global confectionery leader The Hershey Company (HSY - Free Report) .
Hershey’s shares have gained around 9.66% year to date, compared to the 3.6% decline of the Zacks categorized Food-Confectionary industry. Estimates have also moved north for 2016 and 2017. Also, Hershey beat earnings estimates in all of the past three quarters. The company’s productivity improvements and cost savings initiatives should drive the stock’s performance in the upcoming quarters as well.
Pros
Hershey is the largest producer of quality chocolate products in the U.S. It markets some of the world’s leading brands which enjoy widespread consumer acceptance. The company is also a global leader in sugar confectionery products, which is an attractive category as confectionery products are easily available, affordable and highly indulgent, thus making the industry almost recession-resistant. The $25 billion CMG category is the largest segment of the $85 billion U.S. snacks market.
In order to counter tepid sales, management has optimized its North American manufacturing footprint, added manufacturing capabilities in international markets, increased supply chain productivity, invested in cost saving projects and improved the sales mix significantly under its continuous improvement and productivity (CIP) program. In 2016, the company expects to achieve combined (CIP and business productivity initiative) savings of around $135 million.
In its last reported third quarter, earnings rose 10.3% on lower advertising costs and higher sales in North America. Hershey also raised its earnings guidance for 2016. The company’s sales were up 2%, the second straight quarter of a rise after four quarters of no growth. Its North America category improved while the International segment saw profits for the first time since fourth-quarter 2014. Volumes also increased after almost two years.
Cons
Although, Hershey has been registering sales growth in recent times, its sales trends have been weak since 2014 due to weak category trends, increased competition from broader snacking category and soft international growth. The top-line weakness continued in 2016 with sales declining 0.1% in the first nine months of 2016. Persistent macroeconomic challenges in China continues to hurt the company’s sales.
Gross margin also remains a drag and the company continues to expect 2016 gross margin to be slightly below 2015 levels, mainly due to unfavorable sales mix.
Moreover, the U.S. chocolate category is gradually slowing down. A shift in consumer preference toward healthier snacks like nuts and increased competition from the broader snacking category is denting the demand for chocolate.
Meanwhile, changing shopping habits in the U.S., like channel shifting and e-Commerce, are hurting chocolate category growth. Over the last three years, the average growth rate of the CMG category was about 2.3%, lower than the long-term historical average of 3% to 4%. In fact, the company is witnessing chocolate category softness in key international markets like China as well.
Zacks Rank & Other Key Picks
Hershey currently carries a Zacks Rank #2 (Buy).
Other favorably ranked stocks in the industry include Mondelez International, Inc. (MDLZ - Free Report) , Ingredion Inc. (INGR - Free Report) and Lancaster Colony Corp. (LANC - Free Report) .
All three companies carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Full-year 2016 earnings for Mondelez are expected to grow 11.4%.
Ingredion is expected to witness 20.1% growth in full-year 2016 earnings.
Fiscal 2016 earnings for Lancaster are expected to rise 7.3%.
"Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>