Hershey facing rising cost of business

by Eric Schroeder
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Brookside premium chocolate, Hershey
Hershey’s premium Brookside brand was down as much as 30% during the period.

NEW YORK — Credit Suisse has lowered its first-quarter estimates for The Hershey Co., citing weak sales trends in the United States and China.

Robert Moskow, Credit Suisse
Robert Moskow, research analyst with Credit Suisse

“(Hershey) management went out of its way on the last earnings call to warn the market to expect 1Q results below last year, but we don’t think consensus bakes in the full extent,” Robert Moskow, research analyst with Credit Suisse, wrote in a March 31 report. He added that the revenue and earnings-per-share forecasts have been lowered modestly out of concern that “rising competitive intensity will pressure gross margin.”

Credit Suisse projected first-quarter e.p.s. of $1.03, down from $1.09 in the first quarter of fiscal 2015.

In the research report, Mr. Moskow pointed to Nielsen data indicating a decline in the pace of Hershey’s U.S. retail sales growth over the past 12 weeks ended Feb. 27 to 1.6%, which compared with a rate of 2% over the past 52 weeks. He said the slower pace reflects a “significant” market share loss to Mars and an “alarming” decline in Hershey’s premium Brookside brand, which was down as much as 30% during the period. Other items affecting first-quarter results included a significantly shorter Easter selling period, inventory reductions at the trade and lower merchandising levels at Wal-Mart.

“Mars has been promoting hard candy more aggressively and selling M&M’s at Costco at a 10% discount to last year in an attempt to expand share,” Mr. Moskow said.

Meanwhile, in China Hershey suffered from weak performance from its biggest Chinese customer: Wal-Mart. Mr. Moskow said Wal-Mart experienced poor sell-through of its seasonal merchandise in its fiscal fourth quarter and a 3% decline in same-store sales, which failed to match up with Hershey’s expectation for “flat-to-slightly up” sales growth for the year.

Mr. Moskow said Credit Suisse has lowered its gross margin estimate for Hershey to 45.2% for fiscal 2016, down from 46% in 2015, due in large part to the expected higher cost of doing business.

“Management has been warning investors for a while now about the rising degree of competition for merchandising space as entrepreneurs inundate retailers with new snack entries and certain retailers (especially Wal-Mart) reduce the merchandising space available,” he wrote. “Mars’ recent moves put additional pressure on Hershey to defend itself through higher merchandising investment. Commodity costs are still deflationary for Hershey in 2016, but cocoa and sugar prices have started to move higher in recent months. The combination of all of these factors at once along with the general malaise in category innovation suggest that Hershey’s gross margin can only go lower from the 46% peak achieved in 2015.”
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