Hershey Cuts Outlook on Soft Chinese Performance

22 Jun 2015 --- The Hershey Company has updated its financial outlook for 2015. The company’s North America confectionery business is on track to deliver on its 2015 financial objectives, driven by solid gross margin expansion, and continues to gain market share. New product and Halloween orders are solid and the company expects this segment to build on its momentum in the second half of the year.

In China, Hershey chocolate growth was below expectations in April and May. As a result, the company has tempered its expectations for organic net sales and operating income growth. Macroeconomic challenges and trends are affecting consumer shopping behavior resulting in continued softness within the China modern trade, particularly the tier one hypermarkets where the company generates the majority of its chocolate sales. Additionally, increased chocolate category competitive activity and the accelerated momentum of e-commerce and online purchases are impacting results and prolonging trade inventory destocking. Over the remainder of the year and in 2016, the company’s efforts related to its chocolate business in China will focus on: distribution gains in smaller format stores, core SKUs and brands that deliver the highest return, and determination of the optimal organization structure to drive future growth.

The company is moderating its full-year net sales expectation for the Shanghai Golden Monkey (SGM) acquisition. Recent market visits with valuable sales and distribution networks have indicated that the slowdown in the economy is affecting many consumers, resulting in lower than expected retail velocities. Additionally, distributor trade inventory is at greater than optimal levels. The company also is working with representatives of Shanghai Golden Monkey Food Joint Stock Co., Ltd., to reassess the value of the business, including the 20% of outstanding shares that Hershey is scheduled to acquire on the one-year anniversary of the initial close as well as other assets acquired in connection with the acquisition.

The company estimates full-year 2015 net sales will increase around 2.5% to 3.5%, including a net benefit from acquisitions and divestitures of about 1.5 percentage points and unfavorable foreign currency exchange of approximately 1.5 percentage points. Excluding unfavorable foreign currency exchange rates, full-year net sales are expected to increase about 4.0% to 5.0%. This is less than the previous estimate of 6.0% to 7.0%, primarily due to lower than expected confectionery category growth within the China modern and traditional trades that has impacted the company’s chocolate and SGM businesses. For the full year, the company expects gross margin expansion of 135 to 145 basis points as solid North America gains, driven by price realization, are partially offset by the impact of increased direct trade related to the China trade inventory destocking. As a result, full-year reported earnings per share-diluted, including charges related to the productivity program announced today in a separate press release of $0.29 to $0.35 per share-diluted, is expected to be in the $3.62 to $3.79 range. In 2015, the company expects to achieve approximately 15% to 20% of the aforementioned productivity program total pretax savings of $65 million to $75 million. The company expects adjusted earnings per share-diluted to be in the $4.10 to $4.18 range, an increase of 3% to 5% versus 2014, including dilution from acquisitions and divestitures of around $0.20 per share.