Hershey in Line, Ups Outlook - Analyst Blog

The Hershey Company (HSY) has posted third-quarter 2010 financial results. The quarterly earnings of 79 cents a share remained in line with the Zacks Consensus Estimate but rose 8.2% from 73 cents earned in the prior-year quarter on the heels of growth in emerging markets.

On a reported basis, earnings came in at 78 cents, up 9.9% from 71 cents delivered in the year-ago quarter.

A Look at the Top Line

Despite economic woes, Hershey sustained its top-line momentum with consumers preferring moderately priced candies compared to premium ones. Net sales of $1,547.1 million rose 4.2% from the prior-year quarter, buoyed by core brands' volume growth, effective stock management and lower sales return. Foreign currency translation favorably impacted sales by 0.5%.

However, quarterly sales fell short of the Zacks Consensus Revenue Estimate of $1,561 million. Management hinted that the timing of some seasonal shipments negatively impacted the sales by 1%, but this will have a favorable impact on fourth quarter sales.

Management is ramping up its advertising spending, expecting an increase of 50% to 60% from last year, in order to woo consumers through promotional campaigns, and raising awareness about new product launches such as, Hershey's Drops and Reese's Mini's. 

Margin Expansion

Hershey's adjusted gross margin for the quarter expanded 290 basis points (bps) to 42.7%, reflecting increase in productivity and favorable sales mix, partially offset by a rise in marketing and selling expenses. The operating margin for the quarter improved modestly by 10 bps to 19.7%.

Management now expects adjusted gross and operating margins to increase in fiscal 2010 on the back of effective cost management. The growing sales as well as margin expansion prompted management to lift its bottom-line outlook.

Hershey Sees Higher Earnings

Hershey now expects fiscal 2010 earnings between $2.52 and $2.56 per share, up from $2.47 and $2.52 previously forecasted. For fiscal 2011, the manufacturer of Hershey's Kisses and Kit Kat bars expects earnings in the range of $2.67 to $2.76 per share, reflecting a growth of 6% to 8% that remains in line with the company's long-term target.

However, Hershey reiterated its growth target of 7% in the top-line for fiscal 2010. For fiscal 2011, it expects sales to rise in the range of 3% to 5% consistent with its long-term target.

Other Financial Details

Hershey ended the quarter with cash and cash equivalents of $244.9 million, long-term debt of $1,250.5 million, reflecting a debt-to-capitalization ratio of 59.2%, and shareholders' equity of $862.9 million.

Hershey Holds a Zacks #3 Rank

Currently, we are Neutral on the stock. Moreover, Hershey holds a Zacks #3 Rank, which translates into a short-term Hold recommendation and correlates with our long-term view.

The implementation and execution of a price increase, investments in core brands and supply chain improvement plans have helped the company to sustain its growth momentum. The company also has a strong presence in the health and wellness category along with strong distribution partnerships. However, increasing competition in the confectionery category is negatively affecting Hershey's near-term prospects.

Hershey is primarily a North American company, having small exposure to foreign markets with sales outside of North America representing less than 10% of its total revenues. However, by focusing on disciplined expansion in Asia and the Americas and by leveraging its core competencies, the company aims at expanding internationally. The key markets highlighted for growth include Mexico, Greater China, India and South America where the company's brands are well known and have potential for growth.