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Hershey Beats 1Q Earnings, Ups View

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Renowned Chocolate maker, The Hershey Company’s (HSY - Free Report) first-quarter 2013 adjusted earnings of $1.09 per share beat the Zacks Consensus Estimate of $1.04 per share by 4.8%. Earnings also rose 13.5% from the prior-year quarter driven by decent top-line growth and solid margins in the quarter.

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.

The company once again reaffirmed its full-year 2013 sales outlook but raised its earnings guidance as it expects to gain from increased marketing investments behind new products and international markets and lower input costs and other cost savings despite a challenging macroeconomic environment.

Revenues and Volume Growth

Hershey’s net sales of $1.83 billion rose 5.5% from the prior-year quarter, in line with management’s expectation of being within the long-term target of 5% to 7%. The first quarter faced strong year-ago comparisons due to a shorter Easter season this year in the U.S. versus last year. Despite headwinds from difficult comparisons, Hershey delivered a decent volume growth. However, the company’s quarterly sales marginally missed the Zacks Consensus Estimate of $1.835 billion.

Volume added 5.3 percentage points (pp)to revenue growth driven by improving volume trends and market share gains of core brands in the U.S. and the launch of Brookside brand products in the quarter. The improving volume trends of core brands in the U.S. were driven by increased advertising investments, consumer promotions and innovation. The launch of Brookside brand products in the quarter added 2.0 pp to the volume growth. Hershey acquired Brookside Foods, a Canadian confectionary company, in January last year. Pricing added a further 0.5 pp to revenue growth. Currency hurt revenues by 0.3 pp, worse than a similar positive impact last quarter.

The company is consistently gaining market share in core U.S. retail channels. For the 12 weeks ended Mar 23, 2013, Hershey’s U.S. CMG (Candy, Mint, Gum) retail takeaway in channels which account for over 90% of the U.S retail business, grew 8.6% year over year (excluding Easter seasonal activity in the year-ago and current period). The market share in these channels grew 1.4 share points over the same timeframe (including Easter seasonal activity in the year-ago and current period). These channels include food, drug, mass merchandisers including Wal-Mart Stores, Inc. (WMT - Free Report) , and convenience stores.

Margins Go Up

Hershey’s adjusted gross margin for the quarter expanded 240 basis points (bps) to 46.6%, driven by lower input costs, pricing and productivity benefits, and improved efficiencies from supply chain initiatives.

Excluding advertising, selling, marketing and administrative expenses (SM&A) increased 9% in the first quarter of 2013. However, the SM&A increase was lower than management’s expectations.

Advertising spend increased by 22% over the prior-year quarter due to increased marketing and promotional efforts and higher costs to support the launch of Brookside branded. Operating margin improved 70 bps in the quarter to 22.0% due to lower-than-expected SM&A.

The company continuously invests in advertising and marketing capabilities to build its brands globally. The company’s brand investments give it a competitive advantage and are one of the principal reasons behind the company witnessing better volume elasticity versus its peers.

2013 Earnings Outlook Updated

The company maintained its outlook for net sales growth to be within its long-term targets of 5%–7% (including foreign exchange impact). Volume growth of core brands in the U.S. and the expansion of five core brands in international markets driven by increased investments in advertising and go-to-market capabilities; increased innovation such as Kit Kat Minis, Twizzlers Bites and Jolly Ranchers Bites; and broader launch of Brookside brand products in core retail channels in the U.S. are expected to help Hershey achieve its sales targets.

Gross margins are expected to expand in 2013 by 190 to 210 bps up from prior expectations of 180–200 bps, driven by input cost deflation, productivity gains and costs savings.

The company expects SM&A expenses to increase year-over-year slightly more than the first-quarter growth of 9% which is lower than prior expectations of 9% to 11%. Advertising expenses (as a percentage of revenue) are expected to increase 20% year over year in fiscal 2013 (maintained), mainly to support the Brookside product launch, new product launches in both the U.S. and international markets and accelerated advertising investments in key international markets. Specifically, the company will increase promotional efforts for the Hershey’s brand in China and Hershey's Mais in Brazil.

The company upped its adjusted earnings guidance to a range of $3.61–$3.65 per share from the prior expectation of $3.56–$3.63 per share, despite planned increases in advertising and marketing costs. The adjusted earnings guidance represents growth of about 12% year over year, higher than the prior expectation of growth in the range of 10%–12%.

Other Stocks to Consider

Hershey carries a Zacks Rank #2 (Buy).Hershey’s strong brand positioning, strategic marketing investments in core brands, disciplined innovation, and consumer capabilities make it attractive. Some food companies that are currently doing well and have a bright outlook include Flower Foods Inc. (FLO - Free Report) carrying a Zacks Rank #1 (Strong Buy) and Kellogg Company (K - Free Report) carrying a Zacks Rank #2 (Buy).

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