Hershey's crunchy innovation going smoothly

by Jeff Gelski
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Hershey's Cookie Layer Crunch
Hershey’s Cookie Layer Crunch bars became available nationwide last December.

HERSHEY, PA. — After the first-quarter success of Hershey’s Cookie Layer Crunch bars, The Hershey Co. will launch other products designed to increase snacking occasions.

Michele Buck, Hershey
Michele G. Buck, president and c.e.o. of Hershey

“Snacks, which confectionery is a large part of, is performing better than many of the center-of-store categories, and we expect that to be the case going forward,” said Michele G. Buck, president and chief executive officer of The Hershey Co., in an April 26 earnings call.

Hershey’s Cookie Layer Crunch bars became available nationwide last December. Net sales in the first quarter ended April 2 were in line with company estimates, Ms. Buck said. The goal was to attain 80% distribution by early February.

Hershey's Cookie Layer Crunch
Retail sales for the Cookie Layer Crunch bars slowed in April.

“We achieved this in eight weeks and had product available in all major channels to coincide with the beginning of T.V. and digital advertising,” she said. “The take on (the) standup pouch is doing very well, followed by the king-size pack type. Sales by classic trade are tracking as expected. C-store results are particularly strong with retail sales 2x that of any other channel.”

While early, repeat purchases are tracking nicely, Ms. Buck said. Retail sales for the Cookie Layer Crunch bars slowed in April, given the Easter period, she said. Hershey has yet to introduce a seasonal pack type or packaging for the product.

The Hershey Co. in the second quarter will launch the Reese’s Crunchy Cookie Cup, a peanut butter cup infused with crunchy pieces from a chocolate cookie. Reese’s and Hershey’s Crunchers candy also will enter the market.

Reese's Crunchy Cookie Cup, Hershey
The Hershey Co. in the second quarter will launch the Reese’s Crunchy Cookie Cup.

“Our research continues to show that snacking occasions have increased throughout the day,” Ms. Buck said. “The modern snacking model indicates 90% of consumers snack multiple times throughout the day. We expect that Crunchers will capture a portion of these snacking occasions as it combines powerful growing brands with sweet and crunchy textures to deliver a light, crisp eating experience.”

Power brands perform well

Net income attributable to The Hershey Co. in the quarter was $125,044,000, or 60c per share on the common stock, which was down 46% from $229,832,000, or $1.09 per share on the common stock, in the previous year’s first quarter. Adjusted net income was $282.1 million, or $1.31 per share, which was up 18% from $238.9 million, or $1.10 per share, in the previous year’s first quarter. Net sales of $1,879,678,000 in the first quarter were up 2.8% from $1,828,812,000.

“Our core power brands, Reese’s, Hershey’s, Kit Kat, Kisses and Ice Breakers, which had 2016 retail sales of $5 billion, continue to perform well,” Ms. Buck said. “In the first quarter, combined non-seasonal retail takeaway on these brands increased 5.6%.”

Hershey power brands: Hershey's, Reese's, Kit Kat, Ice Breakers
Hershey's core power brands, which include Reese’s, Hershey’s, Kit Kat, Kisses and Ice Breakers, continue to perform well.

In North America in the first quarter, segment income was $553,138,000, up 4.5% from $529,390,000, and net sales were $1,677,146,000, up 2.7% from $1,633,471,000. In the United States, first-quarter net sales were greater than U.S. retail takeaway because of the timing of Easter, Ms. Buck said. Easter was on April 16 this year, or after the first quarter ended, compared to March 27 last year.

In International and Other in the first quarter, segment income was $1,723,000, which compared to a loss of $13,233,000 in the previous year’s first quarter, and net sales were $202,532,000, up 3.7% from $195,341,000.

“Net sales were essentially in line with our plan, and on a constant currency basis, up 4.2% versus the first quarter of 2016,” Ms. Buck said of International and Other. “I was particularly pleased with Mexico, Brazil and India, where constant currency first-quarter net sales increased a combined 15%. In Mexico, our chocolate retail takeaway increased solid double digits, although slightly less than the category growth of about 15%.”

Still optimistic about China

Hershey is implementing a “Margin for Growth Program” in China, said Patricia A. Little, chief financial officer and senior vice-president for Hershey.

Patricia Little, Hershey
Patricia A. Little, c.f.o. and senior vice-president for Hershey

“The program includes an initiative to optimize the manufacturing operations supporting our China business,” she said.

The Hershey Co. in China recognized impairment charges of $106 million in the first quarter to write down certain intangible assets connected to the 2014 acquisition of Shanghai Golden Monkey, a Chinese confectionery company, Ms. Little said. Hershey also wrote down property, plant and equipment by $102.7 million, she said. During the first quarter, the company recognized estimated employee severance and related charges.

China’s chocolate category performance in the first quarter was in line with the company’s forecast.

Hershey China
China’s chocolate category performance in the first quarter was in line with the company’s forecast.

“We remain optimistic about the long-term outlook in China,” Ms. Little said, but she added impulse categories underperformed.

“Therefore, our full-year sales outlook in China is slightly lower than our previous estimate,” she said. “We expect China net sales in 2017 to decline single digits on a percentage basis versus last year. Because direct trade, returns, discounts and allowances should be lower than last year, gross sales will be down by a greater amount. However, given the choppiness in the China market over the last one to two years, this outlook could change if there's a pullback in the market.”

Outlook for 2017

The Hershey Co. estimated net sales growth companywide for the fiscal year will be nearer the low end of the 2% to 3% outlook. Since Hershey expects categories within snacks will outpace center-of-the store products, the company expects its non-seasonable results to improve, Ms. Buck said.

Hershey facility
The Hershey Co. estimated net sales growth companywide for the fiscal year will be nearer the low end of the 2% to 3% outlook.

“However, given the uncertainty regarding overall U.S. brick-and-mortar retail trends, our updated full-year U.S. net sales growth rate is lower than our previous forecast,” Ms. Buck said.

The company expects the full-year increase in adjusted earnings per share to be nearer the high end of its outlook of $4.72 to $4.81, which would be a 7% to 9% increase from the previous year. 
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