It has been about a month since the last earnings report for Hershey (HSY). Shares have added about 4.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Hershey due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Hershey Q2 Earnings & Sales Beat Estimates
Hershey delivered robust second-quarter 2019 results. Adjusted earnings per share of $1.31 surpassed the Zacks Consensus Estimate of $1.18 and rose 14.9% year over year. The upside can be attributed to higher sales, lower tax rate and expanded margins. Effective tax rate (on an adjusted basis) contracted 120 basis points (bps) to 14.8% in the quarter.
Consolidated net sales of $1,767.2 million rose 0.9% year over year and surpassed the Zacks Consensus Estimate of $1,763 million. Net price realization and volumes benefited sales growth by 1.2 points and 0.6 points, respectively. However, buyouts and divestitures had an adverse impact of 0.6 points on the top line. Further, currency translations had a 0.3-point adverse impact on sales.
Margins in Detail
Adjusted gross profit, which amounted to $821.2 million, increased nearly 5% year on year. Adjusted gross margin expanded 200 bps to 46.5%, primarily supported by 90 bps benefit from favorable mix and fixed costs absorption.
Total advertising and related consumer marketing expenses increased 5.6%. Excluding this, selling, marketing and administrative costs slid 1.4%, courtesy of decline in spending for Margin for Growth initiative and reduced acquisitions costs.
Adjusted operating profit amounted to $370 million, up 9% from the prior-year quarter’s figure. Adjusted operating margin expanded 150 bps to 20.9%, primarily owing to improved gross margin.
North America (the United States and Canada) net sales inched up 0.5% to $1,568 million, primarily driven by improved pricing. Markedly, pricing boosted the unit’s sales by 1.5 points. However, volumes, net impact of acquisitions and divestitures as well as foreign currency dragged the unit by nearly 0.5 point, 0.3 point and 0.2 point, respectively. Income in the segment rose 6.1% to $470.9 million on the back of favorable gross margin.
Net sales in the International and Other segment rose 3.9% to $199.2 million. Volumes in the unit improved 9.6 points. Divestitures, net price realization and foreign currency made unfavorable impact of 3.2 points, 1.3 points and 1.2 points, respectively. Combined net sales for the company’s focus market that includes Mexico, Brazil, China and India contracted 4%. On a currency-neutral basis, net sales from these markets were up nearly 5%. Segment income came in at $21.9 million in the quarter, up 32% year over year. This was fueled by an improved gross margin and stronger volumes.
Hershey ended the quarter with cash and cash equivalents of nearly $366 million, long-term debt of $2,888 million and total shareholders’ equity of $1,684 million.
In a separate press release, Hershey declared quarterly dividend payouts of 77.3 cents per share for its common stock and 70.2 cents per share for Class B shares, each reflecting a rise of nearly 7%. This is payable on Sep 16, 2019 to shareholders of record as on Aug 23.
More Details on 2019 Guidance
Hershey updated its outlook for 2019. It now expects net sales to rise 2%, wherein buyouts and divestitures are expected to make nearly 0.5-point positive impact. Currency headwinds are anticipated to be minimal on net sales growth.
Further, Hershey envisions adjusted EPS for 2019 in the range of $5.68–$5.74 compared with the prior guidance of $5.63-$5.74. The revised bottom-line view indicates a rise of 6-7% from the reported figure of 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, Hershey has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Hershey has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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