A month has gone by since the last earnings report for Hershey Company (The)HSY . Shares have added about 7.4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Hershey Tops Q1 Earnings, Updates 2017 ViewThe Hershey Company’s earnings beat the Zacks Consensus Estimate, while sales missed the same in first-quarter 2017. The leading chocolate manufacturer also updated its expectations for 2017.
Hershey’s first-quarter adjusted earnings per share of $ 1.31 beat the Zacks Consensus Estimate of $ 1.26 by 3.9%. Earnings also increased from the year-ago profit level of $ 1.10 by 19.1%. Earnings benefited from solid gross profit margin growth as well as the timing of some SG&A investments.
Net sales of $ 1.88 billion missed the Zacks Consensus Estimate of $ 1.90 billion by 1.1%. Net sales, however, improved 2.8% year over year. This marks the fourth straight rise in quarterly sales after few quarters of no growth.
Currency favorably impacted revenues by 0.1%. Acquisitions had a 0.9% positive impact.
Organically, excluding the impact of currency, sales were up 2.7% as demand strengthened in the U.S.
Volume growth of 0.7% included a contribution of 0.9% from the barkTHINS brand acquisition. Net price realization had a 2% benefit due to lower levels of trade.
Quarterly Segment Discussion
North America (U.S. and Canada) net sales rose 2.7% to $ 1.68 billion. Pricing benefited 1.2%, while volumes rose 0.3% driven by seasonal growth. The acquisition of the barkTHINS brand (acquired in April) resulted in a net benefit of 1%.
First-quarter net sales of Hershey’s International and Other segment improved 3.7% to $ 202.5 million. Currency impact hurt sales by 0.5%. Excluding currency headwinds, sales were up 4.2% due to pricing gains. While pricing rose 8.7%, volumes declined 4.5% from the year-ago level.
Constant currency sales were solid (about 15%) in Mexico, Brazil and India. China net sales increased mid-single digits on a year-over-year basis.
Hershey’s adjusted gross margin expanded 70 basis points (bps) to 47.5% buoyed by favorable trade, supply chain productivity and costs savings initiatives and lower input costs, which offset other higher supply chain costs.
Excluding advertising, selling, marketing and administrative expenses (SM&A) decreased 1% as cost savings and efficiency initiatives were partially offset by investments in go-to-market capabilities and increased depreciation and amortization. SM&A expenses include investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.
Again, total advertising and related consumer marketing expenses were on par with first-quarter 2016 level.
Operating margin expanded 170 bps to 23.2%.
The adjusted effective tax rate was 31.5%, lower than 35% in the prior-year quarter.
Second Quarter Outlook
The company is targeting investment tax credit expense that flows through the other income and expense line at around $ 10 million in the quarter. As a result, the second-quarter tax rate is anticipated at about 26%.
Advertising and related consumer marketing expenses is expected to increase in mid to high single digits on a year-over-year basis. Thus, the company expects second-quarter increase in EPS to be lower than the full-year EPS growth rate.
2017 Guidance Updated
Adjusted earnings per share are now expected to be around the high end of the previously stated $ 4.72-$ 4.81 range, which is a 7-9% increase from last year.
Net sales are expected to be at the low end of the previously stated 2-3% range (including acquisition benefit of 0.5%).
Impact of foreign currency is expected to be minimal compared to 0.25% negative impact stated earlier.
The company expects effective tax rate to be in the 27.5% and 28% range, down 100 bps than the previous outlook of 28.5% and 29% range. This is expected to be driven by various tax strategies and higher income tax credits.
Hershey expects its productivity cost savings initiatives and improved input costs to expand adjusted gross margin by about 50 bps, higher than the 15 to 25 bps expected earlier.
CapEx is projected in the $ 270 million to $ 290 million range.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower.
Hershey Company (The) Price and Consensus
At this time, the stock has a strong Growth Score of ‘A’, though it is lagging a bit on the momentum front with a ‘B’. However, the stock was allocated a grade of ‘D’ on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of ‘B’. If you aren’t focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for growth investors than momentum investors.
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.