The Hershey Company (HSY - Analyst Report) announced lower-than-expected first-quarter 2014 results as sales softened and input costs increased. Hershey missed the Zacks Consensus Estimate for both earnings and revenues — possibly one of the softest results for the renowned chocolate maker.
Though management maintained the top- and bottom-line guidance for 2014, it lowered gross margin expectations in anticipation of higher dairy costs.
Hershey’s first-quarter adjusted earnings of $1.15 per share missed the Zacks Consensus Estimate of $1.16 by a penny. Earnings grew 5.5% from the prior-year quarter as lower brand building and advertising costs made up for a weaker top-line performance.
The adjusted earnings mainly exclude acquisition/integration costs, pension costs, and expenses related to Hershey’s supply chain and cost savings program — Project Next Century.
Revenues Were Weak
Net sales of $1.87 also missed the Zacks Consensus Estimate of $1.92 billion by 2.6%. Despite increasing 2.4% from the prior-year quarter, revenues were lower than management’s expectations. Declines in Latin America and inconsistent U.S. retail trends hurt the top line in the quarter.
Lower consumer trips in the instant consumable channels and irregular purchasing patterns within the traditional food and mass channels hurt U.S. retail trends.
In Latin America, Mexico was weak due to unfavorable economic conditions and higher food and beverage taxes which hurt volumes. Brazil sales were hurt by softer volumes due to price increases.
Tough year-ago comparisons which included strong distribution gains by Brookside also hurt sales.
Hershey’s overall volumes grew 3.2%. Currency hurt revenues by 0.8 percentage points, higher than the last quarter.
Lower Marketing Costs Improve Margins
Hershey’s adjusted gross margin for the quarter declined 10 basis points (bps) to 46.5%, due to higher input costs and an unfavorable sales mix (due to higher international sales) which offset productivity gains and improved efficiencies from supply chain initiatives.
Excluding advertising, selling, marketing and administrative expenses (SM&A) increased 4% in the first quarter of 2014, lower than management’s expectation of double-digit increase. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Advertising spend declined 3% over the prior-year quarter. Operating margin improved 30 bps in the quarter to 22.3% as softer gross margins were offset by lower brand building and marketing costs.
2014 Outlook Retained
Though first-quarter sales were soft, management witnessed improving customer trends toward the end of the quarter and in April gaining from the Easter season. Accordingly, management expects sales to pick up in the remainder of the year driven by core brands, several product launches (in both the U.S. and international markets) and greater levels of advertising and consumer marketing.
The company maintained its full-year 2014 earnings expectations. Adjusted earnings per share are expected in the range of $4.05–$4.13, representing a 9–11% year-over-year growth, in line with the long-term goals.
However, the outlook excludes benefits from the pending Shanghai Golden Monkey acquisition (expected to close in the second quarter). On closure, the acquisition could push up the guidance higher.
2014 net sales growth is still expected within the long-term target range of 5–7% (including currency headwinds) which will be driven mainly by volume growth.
However, in anticipation of higher input costs, mainly dairy, management lowered the gross margin guidance. Gross margins are now expected to increase around 20 bps from prior expectations of 50 bps. The higher input costs are expected to be offset by lower advertising costs. Management lowered the advertising expense (as a percentage of revenues) guidance from a mid-to-high single-digit increase to a mid single-digit range.
The advertising costs will be incurred to support core brands as well as product launches in both the U.S. and international markets. SM&A (excluding advertising) expenses are, however, expected to increase at a more modest rate in 2014.
Other Stocks to Consider
Hershey carries a Zacks Rank #3 (Hold). Better-ranked food stocks include J&J Snack Foods Corp. (JJSF - Snapshot Report) , PepsiCo, Inc. (PEP - Analyst Report) and Mondelez International, Inc. (MDLZ - Analyst Report) . All these stocks sport a Zacks Rank #2 (Buy).
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