uploads///Hersheys Profit Margins in Q

What Caused Hershey’s Margin Decline in 2Q16?

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Aug. 3 2016, Updated 10:06 a.m. ET

Gross margin declined

In 2Q16, Hershey’s gross margin fell by 120 basis points to 45.5% compared to 46.7% in 2Q15. Many factors led to the margin decline. These factors include higher commodity costs, higher supply chain cost associated with the startup of the Malaysia manufacturing facility, and unfavorable sales mix. They were partially balanced by supply chain productivity and cost-savings initiatives.

Adjusted operating profit in the second quarter of 2016 increased 2.1% to $295.6 million compared to the second quarter of 2015. This was mainly driven by the increase in annual productivity and cost-savings targets along with the strategic initiative announced in June 2015. However, Hershey’s adjusted operating profit margin declined slightly to 18.1% compared to 18.3% in 2Q15. A lower gross margin led to the decline in its operating margin.

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Management’s view

John P. Bilbrey, Hershey’s chair, president, and chief executive officer, said, “Second-quarter operating results were better than our estimates as North America and International sales sequentially improved, as expected, versus last quarter. Performance partially benefited from the timing of select merchandising and program net sales that occurred in the second quarter that were initially expected to ship in the third quarter.”

Peer performance

Kraft Heinz (KHC), Kellogg (K), and General Mills (GIS) reported operating margins of 23.0%, 12.9%, and 13.5%, respectively, in their last reported quarters. To gain exposure to Hershey, you can invest in the Fidelity MSCI Consumer Staples ETF (FSTA) and the iShares US Consumer Goods ETF (IYK). They invest 0.67% and 0.68% of their holdings, respectively, in HSY.

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