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How Fresh Milk, Pure Sugar Cane May Boost Hershey’s Revenue

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Outlook for 2016

Hershey (HSY) expects net sales growth to increase around 1% for 2016 aided by marketing, innovation, in-store merchandising, and program activity. This estimate is lower than the earlier estimate of 1.5%.

The estimate includes a 1 percentage point adverse impact of currency translation and a 0.5 percentage point benefit from acquisitions and divestitures. Lower US CMG (candy, mint, gum) category growth in the second half of 2016 and macroeconomic challenges in China might affect constant currency net sales growth. So the company lowered its growth estimate to 2% from 2.5%.

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The company expects its gross margin to be slightly lower compared to last year, led by an unfavorable mix related to lower non-seasonal sales. The expectations for adjusted EPS to improve by 3%–4% are intact, which will include dilution from the acquisition impact of $0.05–$0.06 per share. EPS (earnings per share) is expected to be $4.24–$4.28.

The company also increased its annual savings target to about $100 million per year for the three years beginning in 2017. It will be led by continuous improvement and productivity programs during the first quarter. This is an increase from the earlier target of $50 million–$70 million per year. The company now expects 2016 productivity and cost-savings initiatives to be greater than the estimate.

New product launches

During Hershey’s 2Q16 earnings call, management said the company is excited about the upcoming launch of its Reese’s Pieces Peanut Butter Cups, its Kravem meat bar, and its still-to-be-announced Snack-Fection in the fourth quarter.

Also in the second half of 2016, Hershey’s simple ingredients advertising campaign will begin on Hershey’s Kisses Milk Chocolates and Hershey’s Milk Chocolate Bars. These products will be manufactured with fresh milk from local Pennsylvania farms, pure cane sugar, natural flavors, and cocoa beans sourced from West Africa. In China, a new advertising campaign on these two products will begin. Distribution gains in smaller format stores are expected to continue.

The company expects the combined investments of advertising and associated consumer marketing expense along with direct trade in North America to increase in 2016. This will be to support new product launches and in-store merchandising and display activity.

Hershey’s peers ConAgra Foods (CAG) and Campbell Soup (CPB) have risen 10% and 18%, respectively, so far in 2016. Hershey is part of the Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) and the Consumer Staples Select Sector SPDR ETF (XLP), which holds ~4% in HSY.

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