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Why Hershey’s Margins Could Remain Weak in Q3 2018

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Recent performance

Hershey (HSY) has disappointed with its sluggish margin performance over the past several quarters. Higher manufacturing, packaging, and transportation costs have hurt Hershey’s gross profit margins. Trade spending and adverse mix also dented its gross profit margins. The graph below shows that the company’s margins have contracted in the past four quarters.

During the second quarter, Hershey’s gross profit margin fell 260 basis points, reflecting increased packaging and freight costs, increased trade promotional spending, and unfavorable mix. A lower gross margin weighed on the company’s operating margin, which declined 140 basis points.

In comparison, the margins of the company’s peers are also taking a hit from continued inflation in commodities and logistics costs. Kellogg’s (K) gross margin decreased 330 basis points during its last reported quarter, and Campbell Soup’s (CPB) gross margin dropped by 560 basis points.

Conagra Brands (CAG), General Mills (GIS), and J.M. Smucker (SJM) reported declines of 65 basis points, 160 basis points, and 40 basis points, respectively, during the last reported quarter.

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Outlook

Hershey’s (HSY) profit margins are expected to remain low as the benefits from cost savings are expected to be more than offset by cost headwinds and an adverse mix. Although Hershey’s management expects the company’s cost headwinds to subside gradually, its margins are expected to remain weak in 2018. The company expects its gross margins to decline by 125 basis points in 2018.

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