Third Quarter Results

Hershey lowers full-year forecast after international glitch

By Oliver Nieburg contact

- Last updated on GMT

Hershey's Q3 Brazil and Mexico sales to drag down full-year international growth
Hershey's Q3 Brazil and Mexico sales to drag down full-year international growth

Related tags: Net sales, Revenue, Generally accepted accounting principles, Hershey

Hershey has lowered its full year guidance after a slowdown in Brazil and Mexico and a gross profit margin decline due to higher dairy and cocoa costs.

The company’s third quarter (Q3) net sales grew 6% to $1.96bn, but net income was down 4% to $223.7m.

Hershey said in a release that while the firm’s Q3 performance in the US was solid and it gained market share, international sales fell below expectations.

International glitch

 “The company’s chocolate business in China continues to be strong with organic revenue expected to be about $200 million in 2014,” ​it said.

But in the firm’s earnings call today, Hershey CEO J.P Bilbrey said that Brazil and Mexico sales were below expectations.  Hershey’s Q3 Brazil net sales slowed to +5%, while net sales in Mexico fell 4% compared to Q3

“Our businesses in Mexico and Brazil are improving albeit slowly. The macroeconomic environment in these countries continues to be sluggish,” ​said Hershey CFO David Tacka during the earnings call.

Lower sales forecast & gross margin

Hershey now expects international sales for the full-year to be up in low double digits, less than the company’s previous estimate of a 15% increase.

Hershey's Q3 gross profit margin also dropped to 43.8% from 46.1 in Q3 last year. Hershey attributed the fall to higher input costs, particularly from dairy and cocoa.

As a result, the firm lowered its full year net sales expectations from 5-7% growth to 4.75%.

Out of America

Hershey has identified China as its “number one international priority”, ​but Mexico and Brazil are also high on its expansion agenda.

International sales accounted for around 16% of Hershey business in 2012. Hershey is aiming for international markets outside the US and Canada to account for 20% of sales by 2017.

During Q3, Hershey closed a deal for an 80% stake in Chinese candy maker Shanghai Golden Monkey. Hershey also recently launched Reese’s in China, Mexico and Brazil.

In 2015, Hershey will open a $250m factory in Johor, Malaysia in 2015 that will serve 25 markets across Asia.

Home market

Ice Breakers Cool Blasts Peppermint (3)
Launch date for Ice Breakers Cool Blasts Chews pushed back to early 2015 due to complex manufacturing process and greater than expected customer orders, said Hershey.

In North America, Hershey’s Q3 net sales increased 4.2% driven by strong Halloween orders.

In the US, Bilbrey said that Hershey gained 0.5 points market share in chocolate, non-chocolate candy, gum and mint in Q3.

The firm grew its leading US market share in year-to-date by  0.2 points to 31.2%. Bilbrey said that preliminary Halloween net sales had been slightly above expectations and said that Hershey would gain market share for the season.

“However, retail store traffic and consumer trips continue to be irregular within the food channel. This has adversely impacted purchases of non-seasonal everyday candy products,”​ he said.

Price hike

In July, Hershey introduced an 8% price hike for its instant consumables, multi-pack, packaged candy and grocery lines in the US, Puerto Rico and export markets.

Other large confectioners such as Nestlé, Mondelēz International and Mars Chocolate North America also raised whole prices during the year in response to mounting input costs, particularly from cocoa.

Hershey said the price hike would mean lower volumes for the remainder of 2014 and for 2015 (between 0-2%).

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