Dive Brief:
- Weak sales trends and rising costs for Hershey have caused Credit Suisse to downgrade expectations for the company's first-quarter earnings report.
- Concerns have included that "rising competitive intensity will pressure gross margin," Credit Suisse analyst Robert Moskow wrote. Hershey's gross margin estimate from Credit Suisse has dropped to 45.2% for fiscal 2016, down from 46% in 2015, due namely to predictions of higher costs for Hershey to do business.
- Nielsen data showed a decline in Hershey's U.S. sales growth to 1.6% over the 12 weeks ended Feb. 27, whereas growth was 2% in the past 52 weeks. Moskow said Hershey had yielded "significant" market share to its competitor Mars. Brands like Brookside were particularly struggling, down as much as 30% in the period.
Dive Insight:
That 46% margin was a peak, Moskow said, and with the way the industry is going, that margin is likely to fall. Commodity costs for sugar and cocoa have been favorable for Hershey and its competitors, but those prices have started to increase recently. Hershey has also felt pressure from Mars to invest in merchandising to remain more competitive, particularly as retailers like Wal-Mart reduce the amount of merchandising space available.
On top of these increased costs, Hershey has seen a slowdown at the top line, which means its peak margin will not go unscathed in the coming quarter's results.
Hershey has kept busy trying to find new ways to entice customers as the snacks and candy segments become more competitive with the addition of natural and organic players. The company announced a regional launch of better-for-you snack brand SoFit earlier this year. For the 2015 holidays, Hershey debuted premium chocolate line Hershey's Kisses Deluxe and released Kisses and milk chocolate bars without artificial flavors. Hershey was also the first company to adopt GMA's new SmartLabel.
Hershey is expected to report earnings on April 28.