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Hershey Q3 profit falls 10%

By Oliver Nieburg+

25-Oct-2012
Last updated on 25-Oct-2012 at 14:48 GMT

The Hershey Company has reported a profit drop in its third quarter (Q3) results after tax rate rises, commodity costs and charges related to supply chain efficiencies hit the company’s results.

Sales were up around 5% to $1.7bn compared the same period last year, but profits nosedived from $197m in Q3 2011 to $177m this year.

Charges

The company paid out $25.8 million for its Project Next Century program during the quarter, which included upgrades to its West Hershey facility that opened last month.

The firm also incurred $4.8 million in acquisition and integration costs related to its 2011 Brookside Foods buy.

Hershey reported that the Q3 tax rate was higher than last year.  It expects the full-year tax rate to be about 35%.

The Q3 cocoa grind for North America was down 2%, figures last week showed, leading analysts to say that consumer demand in the US was waning.

Gum, candy and mint share gains

However, Hershey president and CEO John P. Bilbrey painted another picture: “The Hershey Company delivered another good quarter of core brand growth driven by solid performance within key retail channels,”

The year to date has been more profitable for Hershey. Nine-month profits stand at $511m compared to $486m last year, up 5%.

Bilbrey said that Hershey had gained market share by 1.1 points in the US candy, mint and gum retail category.

“I'm particularly pleased with our chocolate marketplace performance where we gained 0.4 market share points driven by core brands and new products,” he added.

Hershey launched a reduced fat chocolate product in June called Simple Pleasures, its first new brand since 2007.

Seasonal & commodity costs

“Halloween sales are off to a good start with solid programming, merchandising and promotions being executed in the marketplace,” added Bilbrey.

However, he said that commodity costs remained an obstacle.

“As the year has progressed, commodity markets have remained volatile. Input costs in 2012 will be higher than last year, although our current forecast indicates that the increase will not be as much as our earlier estimate,” he said.

The company now expects its expect adjusted gross margin to increase 120 to 140 basis points, greater than our previous forecast of between a 100 and 120 basis point rise.

Hershey will increase advertising by 13 to 15% versus 2011, which is also higher than a previous forecast.

Outlook

 “As we look to 2013, we assume the economic environment for retailers and consumers will continue to be challenging,” said Bilbrey.

“However, we believe the investments we've made have resulted in a business model that is more efficient and effective, enabling us to deliver predictable, consistent and achievable marketplace and financial performance, “ he continued.

Hershey has narrowed its net sales growth for 2012 to between 8 and 9% as it expects strong seasonal performance in Q4. The previous forecast was between 7 and 9%.

However, sales growth is expected to slow to between 5 and 7% in 2013.

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