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Hershey’s International Segment Flexes Its Muscles in 2Q16

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Hershey’s revenue contributors

Hershey (HSY) operates through two geographical segments: North America and International and Other. The North America segment accounts for 80%–90% of Hershey’s total revenue each quarter. It contributed about 88% in 2Q16.

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North America segment

Hershey’s North America operations include the United States and Canada. Sales in 2Q16 increased 3.2% to $1.5 billion. It included a 0.3-point adverse impact of currency translation in Canada. Excluding the forex (foreign exchange) impact, net sales rose by 3.5%.

Volume, led by the timing of shipments and the barkTHINS acquisition, added 4.5 points and 0.6 points, respectively, to sales growth. More direct trade adding to in-store merchandising and display was a headwind of 1.6 points to sales growth.

Operating income for the North America segment fell ~8% to $425.7 million in 2Q16. What led to the decline was lower gross margin due to higher levels of direct trade and unfavorable sales mix. Adding to the fall was a 10.6% rise in advertising and related consumer marketing expenses as well as increased commodity costs.

Hershey’s US retail takeaway, which includes candy, mint, gum, salty snacks, snack bars, meat snacks, and grocery items, ended July 9, 2016, rising slightly by 0.5%. Its US CMG (candy, mint, gum) market share was 30.8% for the 12 weeks ended July 9, 2016.

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International and Other segment

The International and Other segment also showed an increase of 7.6% to $192.8 million. With the contribution of lower direct trade and returns and discounts and allowances in China, net price realization added 20.3 points to sales growth. Currency translation was a headwind of 5.5 points to sales. Discontinuation of the edible oil business in India and lower sales in China caused the 7.2-point decline in volume for this segment.

China’s chocolate category retail sales sequentially showed a better performance in the second quarter. Hershey’s solid marketplace performance drove the 13% increase in constant currency net sales in Mexico and Brazil. This segment reported an operating loss of $3.5 million in the second quarter.

Hershey’s peer ConAgra Foods (CAG) reported an operating loss of $29 million. Campbell Soup (CPB) reported an operating profit of $268 million. 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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