Hershey’s Beats, Raises Guidance

The Hershey Company (HSY - Analyst Report) reported results for the third quarter with earnings of 73 cents per share. Earnings were 6 cents above the Zacks Consensus Estimate and up 14.1% year over year. Profits were primarily driven by price increases and lower restructuring costs.

However, net sales for the quarter were flat year-over-year, increasing 0.4% to $1.5 billion as favorable pricing was almost fully offset by volume declines associated with pricing elasticity, unfavorable foreign exchange and the decision to discontinue certain premium chocolate products. Management stated that core brands such as Kisses are responding to the investments in advertising (which was up approximately 50%), in-store programming and merchandising. In the channels measured by syndicated data, U.S. market share during the third quarter was flat while up 0.3 points year-to-date.

Management also provided an update on the Global Supply Chain Transformation initiative. The company recognized total business costs of $602.7 million year-to-date. Management now expects total pre-tax charges and non-recurring project implementation costs for the global supply chain transformation program to be in the range of $640 million to $655 million, including estimated pension settlement charges in 2009 and 2010.

The company is making the required consumer investments for Halloween and the upcoming holiday seasons. Management is currently executing Halloween-specific seasonal promotions, merchandising and advertising activities.

Additionally, Hershey’s is also planning an increase in advertising in the fourth quarter, and expects fiscal 2009 advertising expense to increase approximately by 50% compared to 2008. Management believes that this investment will benefit the company’s everyday and seasonal business in the near term and into next year.

Gross margin for the quarter expanded 604 basis points (bps) to 39.7% versus 33.7% in the prior-year quarter. The increase was primarily driven by favorable pricing, Global Supply Chain Transformation program savings, and productivity gains, which more than offset the impact of higher input costs. The operating margin for the quarter also expanded 407 bps to 18.8% from 14.8% in the comparable prior-year quarter.

The company had cash and cash equivalents of $119 million and a debt-to-capitalization ratio of 70%.

Based on the results year-to-date, management raised its guidance for fiscal 2009. Net sales growth is now expected to be in the range of 3% to 5%, compared to 2% to 3% stated earlier. Furthermore, management expects commodity costs to moderate and fall below the $175 million target stated earlier.

The company plans to continue investing in the core brands in the U.S. and in key international markets. Advertising expense is now expected to increase by 40% to 45% compared to 20% to 25% per previous expectation.

Annual earnings are now expected to be slightly above the long-term range of 6% to 8% due to the expected decline in commodity costs and benefits from higher advertisement spending.

Management also provided an outlook for fiscal 2010. Hershey’s expects the economic environment in the U.S. and international markets to continue to be challenging. However, management continues to focus on and make appropriate investments in the core brands and expects 2010 net sales growth to be within the 3% to 5% long-term objective.

Although quite early, earnings for fiscal 2010, given the company’s current investments, marketplace performance and cost structure, are projected to be within the long-term objective of 6% to 8%.