Quick Thoughts – HSY


Hershey’s Q1 results this morning struck a familiar note within staples and the broader market this earnings season – miss on revenues, meet or beat on EPS.   HSY constant currency organic sales increased 3.2% (2.4% reported, shy of consensus by ~$40 million).

  • EPS of $1.15 was $0.01 better than consensus as the company maintained full-year guidance (adjusted EPS) of $4.05 to $4.13.

Having said that, some of the details in the quarter were less than robust;

  • Latin America (Mexico and Brazil) was weak and more macro-related than something easily managed by the company;
  • U.S. consumer purchasing patterns were described as “irregular” in Q1, but appear to be improved in April – this sounds like a weather excuse to us, without actually calling out weather in the press release.
  • Gross margins declined 5 bps in the quarter, and the comparisons only get more difficult as we move in Q2 and Q3; in fact, management was forced to lower expectations for gross margin improvement to 20 bps from 50 bps due to volatility in the commodity complex (part of the concern that we expressed in our commentary on dairy);
  • The company lowered guidance for advertising and consumer related marketing expense to a mid-single digit percentage increase in ’14 versus prior guidance of mid to high single digits given back on January 30th.
  • Management suggested that this change was due to a return on investment analysis conducted in non-scale brands – very fortuitous for full-year margins that such an analysis was completed since January and at a time when gross margins were coming under pressure.
  • Having said that, we believe that HSY’s brands are well-nourished in terms of support after a number of years of robust investment by the company, but a tactical decline that could be construed as being related to meeting EPS targets is, at a minimum, a concern.
  • While management has suggested that sales growth would be more weighted toward 2H, comparisons do stiffen through the year.

While we acknowledge that HSY’s share price has declined since we initially stated our concerns surrounding input costs, even with today’s decline we struggle to find value in the name.  While the company’s historical premium versus the balance of the packaged food group is certainly warranted (for a variety of reasons, including pricing power and channel dynamics), the current valuation remains elevated even when compared to that historical premium.

Exhibit 1:  Milk Bar Index




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