Hershey posts sales gain in Q4, but misses expectations
- Hershey’s sales for the fourth quarter were up 2.5% to $1.99 billion from $1.94 billion a year ago, boosted by recent snack acquisitions, according to a release. Net income for the company totaled $337 million, compared to $181 million a year ago.
- The company's North American sales increased 4.3%, which helped offset a 8.9% decrease in international sales. However, income in international markets was up $23.4 million this quarter, compared with a segment loss of $15 million in the fourth quarter of 2017.
- The earnings per share came in slightly under market expectations of $1.27 a share at $1.26, which was still an increase of 23.5% from this time last year. Going into 2019, Hershey reported an expectation of a 1% to 3% increase in net sales.
Hershey still has a long row to hoe in order to become the "innovative snacking powerhouse" that it aims to be. Although its fourth-quarter financials are moving the CPG behemoth in the right direction, it might not be happening fast enough for the market. Hershey shares dropped as much as 3% in trading Thursday morning after earnings missed analyst expectations. But things could be looking up for the company with its 3.7% sales jump this quarter.
The company's improvements highlight Hershey's efforts to no longer be so inextricably beholden to candy. Last year, Hershey purchased Pirate Brands for $420 million. In 2017, it acquired Amplify Snack Brands for $1.6 billion. The company best known for its namesake chocolate continues on the look out for more M&A in the snack space to boost its presence. With its enlarged snack-focused portfolio and chocolate that can be defined as an indulgent snack, the company calls itself the second-largest snack maker, behind PepsiCo. The snacking category is already at $89 billion and growing at a 3% clip, so this focus is bound to help the company continue to grow.
Still, becoming a snacking powerhouse has its costs. The company’s earnings report indicated it still has $8.4 million in acquisition costs to pay down. This persistent debt, coupled with increasingly higher freight and logistics costs and incremental investments in trade and packaging could explain why the gross margin slipped slightly this quarter to 42.5% from 42.7% in 2017.
To help correct this squeeze in margins, Hershey announced last year a 2.5% price increase for a fifth of its products. The earnings report made no mention of any change to this plan, but impact will likely been seen in future earnings reports — especially given the company expects to see a 1% to 3% jump in net sales for 2019.
Hershey has also further reduced its advertising and related consumer marketing expenses by 13.3% in the fourth quarter by focusing on earned media and retailer education with its recently unveiled mobile research center. The idea behind this 18-wheeler is to provide insight into new consumer strategies for marketing and merchandising across different shopping channels, and it seems to be working.
Hershey has also been responding to consumer demands by debuting redesigned center aisles at 20 locations of three retailers. Part of this redesign includes seamlessly integrating e-commerce with brick and mortar — an initiative Bernstein research analysts found successful, compared to other CPG companies. With online grocery sales forecast to reach $100 billion by as early as 2022, 70% of shoppers will at least occasionally shop for groceries online by that time, according to the Food Marketing Institute and Nielsen. It could be wise for Hershey to invest heavily in that space. It already shows signs of paying off, with North American sales jumping 4.3%.
In the earnings report, President and CEO Michele Buck expressed confidence that the company "will build on this momentum in 2019" and work toward increasingly growing the presence of its snack brands as it competes to deliver to customers’ simultaneous desires for indulgence and better-for-you packaged options.