Hershey’s Profits Plunged as Consumers Shift to Health Snacks

Consolidated net sales grew 3.2% to $1.97 billion versus $1.90 billion in the year ago same period

The Hershey Company (NYSE: HSY) announced its Q4 FY16 and full-year FY16 financial results on February 03rd, 2017.

The ‎Hershey, Pennsylvania‎-based Company is a producer of chocolate and non-chocolate confectionery. Hershey is the market leader in chocolate confectionery in the US, with a 31% share at the end of 2015. The Company’s principal confectionery offerings include gum and mint refreshment products; pantry items, meat snacks, bars, and snack bites and mixes. Hershey’s operates through two segments: North America, and International and Other. The Company markets, sells and distributes its products under approximately 80 brand names in over 70 countries across the world.

The Company’s manufacturing facilities are located in Hershey and Lancaster, Pennsylvania; Monterrey, Mexico, and Stuarts Draft, Virginia. Read more about Hershey’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Hershey’s consolidated net sales grew 3.2% to $1.97 billion versus $1.90 billion in the year ago comparable period. Excluding a 0.5 point headwind from foreign currency translation, net sales grew 3.7% versus the year ago period. Higher volume added 3.4 point to overall revenues. Net price realization fell 0.6 points due to slightly higher levels of direct trade supporting increased in-store merchandising and display activity. The barkTHINS brand acquisition was a 0.9 point benefit during the reporting quarter.

Hershey’s adjusted gross margin declined to 44.5% in Q4 FY16 compared to 45.0% in Q4 FY15, due to unfavorable supply chain costs and trade, and partially offset by supply chain productivity and costs savings initiatives. Reported gross margin was 37.7% versus 46.0% in the year ago corresponding period.

The Company’s total advertising and related consumer marketing expense increased versus the prior-year period. Selling, marketing, and administrative (SM&A) expenses, excluding advertising and related consumer marketing and the barkTHINS brand acquisition, increased about 4.5% in the reporting quarter. Higher employee-related costs and increased depreciation and amortization more than offset the aforementioned savings from the efficiency initiatives. As a result, reported operating profit fell 37.4% to $229.5 million in Q4 FY16, resulting in operating profit margin of 11.6%.

An increasing number of health-conscious people are eating less chocolate. In the US and Europe, the largest consuming regions, snackers are seeking healthier options like protein bars and yogurt. At the same time, confectioners have reduced the size of sweets and are using more fillers, the result of cost-cutting measures when cocoa prices surged in the four years through 2015. According to Euromonitor, global retail sales of chocolates in 2016 were down about 1.9% versus 2014. Consequently, reported Q4 FY16 net income plunged to $116.9 million, or $0.55 per share-diluted, compared to $227.9 million, or $1.04 per share-diluted, for the year ago same period.

FY16 financial highlights

During FY16, Hershey’s consolidated net sales grew 0.7% to $7.44 billion versus $7.38 billion in 2015. Reported operating profit rose to $1.20 billion versus $1.03 billion in the prior year, while operating profit margin increased to 16.2% from 14%. As a result, reported net income for 2016 jumped to $720.0 million, or $3.34 per share-diluted, compared to a $513.0 million, or $2.32 per share-diluted, for 2015.

Segmental highlights

North America (US and Canada): During Q4 FY16, this segment’s net sales grew 3.8% to $1.69 billion versus the same period last year. Net volume added a 4.1 point to sales growth while net price realization was a 1.3 point headwind due to planned higher levels of direct trade supporting increased in-store merchandising and display activity. The barkTHINS brand acquisition added a 1.0 point benefit during the reporting quarter.

Total Hershey US retail takeaway for Q4 FY16 and FY16 in the expanded all outlet combined plus convenience store channels (xAOC+C-store) increased 2.2% and 1.0%, respectively. During FY16, total Hershey US market share increased 0.1 points. Hershey’s US candy, mint, and gum (CMG) market share was an industry leading 31.2%, about the same as last year, due to an acceleration of retail takeaway in Q4 FY16 that resulted in a 0.4 point market share gain.

North America segment income increased 1.8% to $521.9 million in Q4 FY16 compared to $512.9 million in the Q4 FY15, driven by an increase in gross profit of about 2.2%, and partially offset by higher advertising, marketing, and selling expense.

International and Other: During Q4 FY16, this segment’s net sales declined 0.5% to $280.1 million. Net price realization was a 2.8 point benefit and volume was about the same as the year ago period. Excluding the 3.2 point impact of unfavorable foreign exchange rates, net sales increased 2.7%. Constant currency net sales growth in Mexico, Brazil and India was solid. China net sales were slightly below forecast due to challenges in modern trade that persist given the current macroeconomic environment. During Q4 FY16, this segment’s net sales, China chocolate category retail sales declined about 4%, the same rate as the second and third quarter declines. During Q4 FY16, segment loss narrowed to $16.7 million compared to loss of $18.3 million in the year ago comparable period.

Other highlights

Share repurchases and dividends: During FY16, the Company repurchased $420 million of outstanding shares, resulting in diluted shares outstanding of 215.3 million at the end of 2016, compared to 220.7 million at the end of 2015. The Company returned a total of about $920 million to stockholders via dividends and share repurchases during the year.

Cash flow: Hershey’s operating cash flow was nearly $1 billion in 2016.

Diversification into snacks: In April 2016, Hershey’s purchased Ripple Brand Collective LLC, a privately held Company based in Congers, New York, that owns the barkTHINS mass premium chocolate snacking brand. Since its launch in 2013, barkTHINS quickly became a favorite snack brand due to its commitment to using simple ingredients, fair trade cocoa, non-GMO certification, and no artificial flavors or preservatives. The barkTHINS brand is largely sold in the US in take-home resealable packages and is available in the club channel as well as select natural and conventional grocers. Annual (12-month) net sales of the business in 2016 are expected to be in the $65 million to $75 million range.

Hershey also acquired Krave Pure Foods, a maker of premium beef jerky with about $35 million in sales, in 2015. With the Krave acquisition, Hershey gained access to Whole Foods customers in the fast-growing meat-snack category. Hershey aims to grow Krave into a $500-million brand.

To beat slowing sales and tap opportunities in the booming snacks market, Hershey’s is diversifying into dried meat with the launch of Hershey beef jerky. The company is launching snack bars with super foods such as acai berries, trail mixes with pieces of Reese’s Peanut Butter Cups, and protein coated jalapeno almonds and pumpkin seeds. Hershey’s is aiming for revenue of $2 billion in the snacks segment as a means to offset the dip in chocolate consumption. A quarter of the snacks revenue is expected to come from jerky and other meat products.

Senior executive appointments: On December 21st, 2016, Hershey’s announced the appointment of Michele Buck, currently the company’s Executive Vice President and Chief Operating Officer, as Hershey’s next President and Chief Executive Officer effective March 01st, 2017. She will succeed John P. Bilbrey, who previously announced his intention to retire from the company. Bilbrey will continue as Non-Executive Chairman of Hershey’s Board of Directors following his retirement as President and CEO.

Healthy food improvements: Hershey plans to stop using GMO sugar, milk from cows treated with bovine growth hormones, artificial colors and flavors, gluten and high fructose corn syrup by the end of 2017. Likewise, Nestle SA is also planning to remove artificial flavors and colors from all its 250 confectionery products by the end of 2017. Many food companies are focusing on healthy food improvements to remove about 150 artificial preservatives, sweeteners, colors and flavors.

Guidance for full year FY17

For FY17, Hershey’s expects full-year net sales to increase 2% to 3%, including a net benefit from acquisitions of about 0.5 points and unfavorable foreign currency exchange rates of about 0.25 points. Reported earnings per share-diluted is expected to be in the $4.54 to $4.65 range. Adjusted earnings per share-diluted is expected to increase 7% to 9% and be in the $4.72 to $4.81 range.

Stock Performance

Hershey’s stock stood at $106.98, slipping 0.20%, at the close on Wednesday, February 08th, 2017, having vacillated between an intraday high of $107.50 and a low of $106.71 during the session. The stock’s trading volume was at 893,741 for the day. The Company’s market cap was at $22.41 billion as of Wednesday’s close.

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