Will Hershey (HSY) Earnings Disappoint Investors In Q2?

The Hershey Company (NYSE:HSY) is slated to report second-quarter 2016 results on Jul 28, before the opening bell. Last quarter, the company posted a positive earnings surprise of 4.76%.

The chocolate maker surpassed earnings estimates in all the last four quarters with an average surprise of 4.37%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Hershey’s sales trends have been feeble since 2014 due to weak category trends, intense competition from the broader snacking category and soft international growth. The top-line weakness persisted in the first-quarter 2016 with sales declining 4.4% due to continued weakness in demand in China and North America.

While slower-than-expected sales of non-seasonal confectionery is hurting sales trends in North America, weak consumer shopping trends due to economic slowdown and softening chocolate category trends have been impacting Hershey’s sales in China since 2015.

With a poor sales history behind, we do not expect any significant improvement in sales trends in the second quarter.

However, despite lackluster sales, Hershey was able to maintain relatively better margins on the back of supply chain savings and productivity gains. As it is evident, from the company’s positive earnings surprises and year-over-year growth in four straight quarters.

The company expects second quarter constant-currency sales growth to be better than the full year rate of 1.5%. However,gross margins are expected to decline in the range of 50 to 100 basis points due to unfavorable sales mix (related to lower non-seasonal sales).

Though profits gained from lower advertising costs in the first quarter, these costs are expected to increase in the second quarter, thereby straining EPS. With new product launches as well as merchandising and display activity in North America expected to be proactive, advertising and related consumer marketing costs are expected to increase in a mid to high single digit range, as a percentage of sales, in the second quarter.

Earnings Whispers

Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Hershey is -1.28% as the Most Accurate estimate is 77 cents while the Zacks Consensus Estimate is pegged higher at 78 cents.

Zacks Rank: Hershey has a Zacks Rank #4 (Sell). Please note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are three companies you may want to consider in the broader food/beverage sector as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Kraft Heinz Co. (NASDAQ:KHC) with an Earnings ESP of +4.23% and a Zacks Rank #3.

Tyson Foods, Inc. (NYSE:TSN) with an Earnings ESP of +0.93% and a Zacks Rank #3.

Post Holdings, Inc. (NYSE:POST) with an Earnings ESP of +12.77% and a Zacks Rank #1.