Weak global retail and consumer demand and shift in consumer preference for healthier food items is hampering growth of the snacks category. Many U.S. snacks producers like Mondelez International, Inc. (MDLZ - Free Report) , General Mills, Campbell Soup Company (CPB - Free Report) and, to some extent, PepsiCo, Inc. (PEP - Free Report) are losing out to consumers’ preference for natural and organic ingredients over packaged and processed food.
One of the largest chocolate makers, The Hershey Company (HSY - Free Report) has also been suffering as demand for chocolates has been hit by the shift in consumers to nuts and other healthier alternatives. Hershey probably witnessed its worst financial year in 2015. The sales trends did not improve in the first quarter of 2016 either.
Here we highlight five reasons why Hershey might not be an attractive pick for your portfolio now.
Poor Rank; Falling Estimates and Share Price: Hershey carries a Zacks Rank #4 (Sell). Moreover, Hershey had a poor run last year with its share price declining around 12%. Over the past 30 days, the 2016 estimate dipped around 2.3%, while that for 2017 fell 1.7%.
Unimpressive First-Quarter Results; Lackluster Guidance:Hershey beat the Zacks Consensus Estimate for earnings but missed the same for revenues in the first quarter of 2016 due to persistent weakness in demand in China and North America. Earnings of $1.10 per share inched up 0.9% as reduced advertising spending and a lower share count offset the weak top-line performance. Excluding currency impact, sales declined 4.4% due to weak volumes and soft pricing. Moreover, the chocolate giant lowered its sales and earnings expectations for 2016 based on lower-than-expected non-seasonal CMG category trends expected through the rest of the year.
Weak Top-Line Performance: Hershey’s sales trends have been weak since 2014 due to declining demand, increased competition from the broader snacking category and soft international sales due to macro headwinds. In 2015, significant currency headwinds and weaker-than-expected sales performance in China hurt sales trends substantially. The U.S. business performance was also below expectations in the last two quarters of 2015 due to slowing marketplace consumption trends. All these adversities compelled Hershey to cut the sales outlook four times last year. In fact, Hershey slashed long-term sales and earnings outlook at the fourth-quarter 2015 conference call after its top line slumped over the past two years. The top line remained weak in the first quarter of 2016 as well with no expectation of any significant improvement through the rest of the year.
Underperformance in China: Weak consumer shopping trends due to economic slowdown as well as deteriorating chocolate category trends have been hurting Hershey’s China sales since 2015. Stiff competition from e-Commerce/online sales and disappointing Golden Monkey performance due to confectionary category weakness are the other factors affecting sales trends in China.
Moreover, since its acquisition in 2014, Golden Monkey has significantly underperformed with sales/profits lower than management’s expectations.
Deteriorating Chocolate Category: 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 lowering the demand for chocolate. Moreover, changing shopping habits in the U.S., like channel shifting and e-Commerce, are hurting chocolate category growth. In fact, the company is witnessing chocolate category softness in key international markets like China as well.
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