Hershey Q1 Net Sales Rise Less Than Forecast

27 Apr 2017 --- The Hershey Company yesterday announced its first quarter sales and earnings, with consolidated net sales reaching US$1,879.7 million compared with US$1,828.8 million for the first quarter of 2016 and reported net income reaching US$125 million, compared with US$229.8 million for the comparable period last year. The company noted that retail sales had been impacted by the timing of Easter, which this year was three weeks later than last year.

"Net sales increased 2.8%, slightly less than our forecast and reflective of the broader soft US food-industry retail trends to start the year. Gross margin expansion was solid, which contributed to strong operating profit growth. First quarter US retail takeaway was primarily impacted by the timing of Easter, however, our market share gains were solid. The launch of Hershey's Cookie Layer Crunch bars got off to a good start and we're following that up with the roll out of Hershey's Crunchers candy and Reese's Crunchy Cookie Cups. Importantly, while preliminary, our Easter sell through is in line with our estimate and we anticipate Hershey US candy, mint and gum (CMG) April year-to-date retail takeaway will be about 2.5%," says Michele Buck, President and Chief Executive Officer, The Hershey Company.

For the first quarter of 2017, reported gross margin was 48.2% versus 44.7% in the first quarter of 2016. Meanwhile, reported operating profit was US$191.9 million, a decline of 43.5% versus the same period in 2016, resulting in operating profit margin of 10.2%, according to the company’s report.

The report indicated that consolidated net sales were US$1,879.7 million in the first quarter of 2017, an increase of 2.8% versus the first quarter of 2016. Excluding favorable foreign currency translation, a 0.1 point benefit, net sales increased 2.7% versus the year ago period. Net price realization was a 2.0 point benefit due to lower levels of trade. Net volume increased 0.7 points, including a contribution from the barkTHINS brand acquisition of 0.9 points.

Adjusted gross margin was 47.5% in the first quarter of 2017 compared to 46.8% in the first quarter of 2016. The 70 basis point increase was primarily driven by favorable trade, supply chain productivity and cost saving initiatives and lower input costs, partially offset by other higher supply chain costs.

"In 2017, we remain focused on driving our North America core brands forward and achieving trial and repeat targets related to the launches of Hershey's Cookie Layer Crunch bars, Reese's and Hershey's Crunchers candy and Reese's Crunchy Cookie Cups," Buck says.

"Additionally, the branded snack mix and snack bites products that launched last year continue to do well, enabling us to expand our breadth across the snack wheel and capture new usage occasions. We anticipate that our innovation, as well as our consumer marketing plans, will enable us to build on our first-quarter US CMG market share gains. April year-to-date marketplace performance, driven by our seasonal business, is tracking in line with our estimates,” Buck says. 

Non-seasonal US CMG trends are expected to improve over the remainder of the year, Bucks says, although the growth rate is expected to be slightly lower than the company had previously forecast. 

“Additionally, macroeconomic challenges persist in China and we expect net sales for the full year to be lower there than 2016. Therefore, we estimate that full-year 2017 net sales growth will most likely be around the low end of our 2.0% to 3.0% outlook, including a net benefit from acquisitions of about 0.5 points. We expect the impact of foreign currency exchange rates to be minimal versus our previous estimate of a 0.25 point headwind,” Buck says.

"Our brands typically respond positively to marketplace investments and we continue to expect that advertising and related consumer marketing expense, as well as selling, general and administrative costs, will increase for the full year 2017 versus 2016. We believe these investments in marketing, technology, IT capabilities and analytic approaches will be enablers of profitable growth. Additionally, the company anticipates its effective tax rate will be slightly lower than its original forecast,” Buck adds. “As a result, the company expects the full year increase in adjusted earnings per share-diluted to be around the high end of its outlook of US$4.72 to US$4.81, a 7% to 9% increase versus last year."

Hershey's North America first quarter net sales increased 2.7% versus the same period last year, to US$1,677.1 million. Volume was a 0.3 point contribution to sales growth driven by seasonal growth and, as anticipated, net price realization was a 1.2 point benefit due to lower direct trade, the company reported, adding that the barkTHINS brand acquisition and foreign currency exchange rates were a 1.0 and 0.2 point benefit, respectively.

North America segment income, including candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items, increased 4.5% to US$553.1 million in the first quarter, compared to US$529.4 million in last year’s first quarter. This increase in segment income was driven by a gross profit increase of about 3.5% versus the first quarter of 2016, partially offset by higher levels of selling expense, investments in greater go-to-market capabilities and increased depreciation and amortization.

First quarter net sales for Hershey's International and Other segment increased 3.7% to US$202.5 million. Net price realization was an 8.7 point benefit and volume declined by 4.5 points. Excluding the 0.5 point impact of unfavorable foreign exchange rates, net sales increased 4.2%. Constant currency net sales growth in Mexico, Brazil and India was about 15%. China net sales increased mid-single digits on a percentage basis versus last year. The increase was driven by lower direct trade expense as gross sales declined versus the first quarter of 2016. Retail sales in the China chocolate category were about the same in the first quarter of 2017 as last year. 

International and Other segment income of US$1.7 million compares to a segment loss of US$13.2 million in the first quarter of 2016. Combined income in Latin America and export markets improved versus the prior year and performance in China benefited primarily from lower direct trade, the company report says.