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Why Hershey’s Profit Margins Could Disappoint in 1Q18

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Factors that affect Hershey’s margins

Packaged food manufacturing companies in the US have been disappointing investors with their sluggish margin performance, and this trend is expected to continue in the next few quarters. Soft sales, increased investments in brands, and inflating costs related to manufacturing and distribution are taking a toll on their margins. 

Price competition among retailers squeezes margins. Analysts expect the benefits from cost savings to subside, which could further pressure profitability.

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Hershey’s (HSY) profit margins are expected to take a hit from increased costs related to manufacturing, packaging, and distribution. Plus, adverse mix and weakening demand for sugary products amid growing health consciousness could pressure the company’s margins. However, cost and productivity savings and lower input costs, primarily with respect to cocoa, should cushion its margins.

In comparison, margins for packaged food manufacturers such as General Mills (GIS), J.M. Smucker (SJM), Campbell Soup (CPB), Kellogg (K), and Kraft Heinz (KHC) are also expected to remain low due to these challenges.

Hershey’s 4Q17 performance

Hershey’s (HSY) profit margins marked a steep decline in 4Q17, as the benefits from cost savings were more than offset by cost pressures and lower volumes. In 4Q17, Hershey’s adjusted gross margin decreased 180 basis points, reflecting an unfavorable mix, soft volumes, and higher packaging and distribution costs.

Hershey’s adjusted operating margin fell 240 basis points, reflecting a lower gross margin and increased costs.

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