Hershey (HSY) Q4 Earnings & Sales Miss Estimates, Improve Y/Y

The Hershey Company (NYSE:HSY) released fourth-quarter 2018 results, with the top and the bottom lines missing the Zacks Consensus Estimate, though both the metrics increased year over year. Results gained from acquisitions and improved volumes. However, cost pressure continued to weigh on gross margin.

This Zacks Rank #3 (Hold) stock has rallied 9.3% in the past six months, outpacing the industry’s growth of 6.6%.

Earnings & Revenue Discussion

Adjusted earnings per share of $1.26 came a penny below the Zacks Consensus Estimate. Nonetheless, the bottom line rallied 23.5% from the year-ago quarter. This can be attributed to higher sales and lower tax rate. Effective tax rate (on an adjusted basis) declined 560 basis points (bps) to 9.5% in the quarter, thanks to U.S. tax reforms.

Consolidated net sales of $1,987.9 million rose 2.5% year over year. However, the top line came below the Zacks Consensus Estimate of $2,012 million. Net impact from buyouts and divestitures, and volumes benefited sales growth by 3.0 points and 0.9 points, respectively. Net price realization and currency translations had 0.8 point and 0.6 point adverse impacts on sales growth, respectively.

Margins Detail

Adjusted gross margin declined 20 basis points (bps) to 42.5%, due to escalated freight and logistics expenses, and greater trade and packaging investments.

Total advertising and related consumer marketing expenses fell 13.3%. Excluding this, selling, marketing and administrative costs were in line with the year-ago quarter’s level. Decline in general administrative expenses was countered by additional selling, marketing and administrative costs of Amplify and investment in the enterprise resource planning (ERP) system. Adjusted operating margin expanded 180 bps to 18.6%.

Segment Discussion

North America (the United States and Canada) net sales rose 4.3% to $1,746.5 million, driven by volume gains and acquisitions. However, net price realization and currency movements played spoilsports. Segment income rose 1.8% to $485.7 million on the back of higher sales, and lower marketing and administrative expenses.

Net sales in the International and Other segment tumbled 8.9% to $241.4 million, owing to divestitures and currency headwinds. This was somewhat compensated by improved net price realization and volumes. On a currency-neutral basis, net sales grew nearly 7% in Mexico, Brazil and India, on a combined basis. Segment income came in at $8.4 million in the fourth quarter, against a loss of $15 million recorded in the same period last year. This was fueled by improved gross margin, higher volumes, and lower selling, marketing and administrative costs stemming from Hershey’s Margin for Growth Program.

Financials

Hershey ended the quarter with cash and cash equivalents of roughly $588 million, long-term debt of $3,254.3 million and total shareholders’ equity of $1,407.3 million.

In a separate press release, Hershey declared quarterly dividends of 72.2 cents per share for its Common Stock and 65.6 cents per share for Class B shares. This is payable on Mar 15, 2019, to shareholders of record as on Feb 22.

2019 Guidance

Management is impressed with its 2018 show and focused on further growth investments. Notably, the company’s investments in its core confection business are yielding and leading to enhanced retail trends and margins. The company’s recently purchased snacking brands are also performing quite well. Moreover, Hershey’s International business saw record profits this year. All said, management is encouraged about keeping its solid momentum alive in 2019.

For 2019, Hershey expects net sales to rise 1-3%. Net impact from buyouts and divestitures is expected to have a roughly 0.5 point positive impact. Currency headwinds are anticipated to have a minimal impact on net sales growth.

Finally, Hershey envisions adjusted EPS for 2019 to be $5.63-$5.74, reflecting a 5-7% increase from 2018.

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