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Why Hershey’s Strong 1Q18 Results Failed to Boost Its Stock

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Hershey beats estimates

Hershey (HSY) reported better-than-expected 1Q18 results on April 26. The company’s top and bottom lines surpassed analysts’ expectations, reflecting favorable currency rates, lower tax, and incremental sales from its recent acquisition, Amplify Snack Brands.

However, a larger-than-expected contraction gross margin contraction, of 260 basis points, didn’t sit well with investors. Moreover, the company’s gross margin growth is expected to decline in coming quarters, reflecting higher trade spending and increased manufacturing, packaging, and transportation costs. A shorter Easter season, unfavorable mix, and SKU (stockkeeping unit) rationalization efforts are likely to affect the company’s fiscal 2018 sales growth rate. Hershey now expects organic sales growth to be at the lower end of its previous guidance range, at ~2.0%.

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Stocks continue to trade negatively

Packaged food manufacturers have been undoubtedly weak this year. Sales and margin headwinds continue to affect their financials, and in turn, their stock performance. A challenging retail landscape owing to Amazon’s (AMZN) expansion and private label brands’ growing shelf space also poses challenges.

Year-to-date, Hershey stock had fallen ~17.8% as of April 26. Peers have done no better. Kraft Heinz (KHC), General Mills (GIS), Campbell Soup (CPB), Kellogg (K), Mondelēz (MDLZ), and Conagra Brands (CAG) have fallen 26.3%, 25.2%, 13.3%, 11.6%, 7.1%, and 0.7% this year, respectively, and the S&P 500 (SPY) has been flat.

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