The Hershey Co. recorded growth during the second quarter of 2016, and the company expects its growth to continue for the remainder of the year.
The Hershey Co. has released the company’s sales and earnings for the second quarter ending July 3, 2016. Data released by the company indicates that the company experienced growth that exceeded company expectations for the quarter.
Consolidated net sales were $1,637.7 million compared with $1,578.8 million for the second quarter of 2015. Reported net income for the second quarter of 2016 was $146.0 million or 68-cents per share-diluted, compared with a net loss of $99.9 million or 47-cents per share-diluted for the comparable period of 2015.
“Second-quarter operating results were better than our estimates as North America and International sales sequentially improved, as expected, versus last quarter,” said John Bilbrey, chairman, president and CEO, The Hershey Co. “Performance partially benefited from the timing of select merchandising and program net sales that occurred in the second quarter that were initially expected to ship in the third quarter. Non-seasonal candy, mint and gum (CMG) category growth progressed in the second quarter; however, given the amount of activity in the marketplace, category growth was less than what we anticipated. We’ve yet to experience consistent broad-based marketplace gains that are reflective of the attractive CMG category and Hershey’s competitive advantages. In the coming quarters we will begin to share the results of the work being performed that should benefit the company in the near and long term. Over the remainder of 2016, our CMG in-store merchandising, new products and consumer investment will be strong and should result in a sequential improvement in retail takeaway performance. Additionally, as we stated last quarter, the company continues to focus on its cost structure and estimates that full-year 2016 productivity and cost savings initiatives will be greater than our previous forecast, enabling the company to deliver on its adjusted earnings per share-diluted commitment. I’m also pleased that the Board of Directors approved a dividend increase of 6%. The company continues to generate steady free cash flow and has a strong balance sheet. This dividend increase reflects our confidence in Hershey’s marketplace position and long-term growth potential.”
For the second quarter of 2016, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of $32.9 million, or 17-cents per share-diluted. Reported gross margin of 45.6% represented a decline of 100 basis points versus the second quarter of 2015, while reported operating profit of $262.8 million increased $255.3 million versus the same period last year. For the second quarter of 2015, items impacting comparability totaled $281.9 million, or $1.25 per share-diluted. Adjusted net income, which excludes these items, was $182.6 million, or 85-cents per share-diluted, for the second quarter ended July 3, 2016, compared with $171.9 million, or 78-cents per share-diluted, for the same period of 2015.
For the first six months of 2016, consolidated net sales were $3,466.5 million compared with $3,516.6 million for the same period of 2015, a decrease of 1.4%. Reported net income for the first six months of 2016 was $375.8 million or $1.74 per share-diluted, compared with a $144.8 million or 65-cents per share-diluted for the comparable period of 2015. For the first six months of 2016 and 2015, these results, prepared in accordance with GAAP, included items impacting comparability of $60.7 million and $281.6 million, or 21-cents and $1.22 per share-diluted, respectively. Adjusted net income, which excludes these items, was $421.5 million, or $1.95 per share-diluted, for the first six months of 2016, compared with $415.4 million, or $1.87 per share-diluted, for the same period of 2015, an increase of 4.3% in adjusted earnings per share-diluted.
In 2016, the company expects reported earnings per share-diluted of $3.77 to $3.86, including items impacting comparability of approximately 42- to 47-cents per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment charges of 44- to 47-cents per share-diluted, non-service related pension expense (NSRPE) of seven- to eight-cents per share-diluted, net acquisition integration costs of three- to four-cents per share-diluted and a favorable settlement of the Shanghai Golden Monkey liability of 12-cents per share-diluted.
Additionally, the Board of Directors of The Hershey Co. declared a quarterly dividend of $0.618 on the Common Stock and $0.562 on the Class B Common Stock, an increase of 6% on both classes of stock, or $0.035 and $0.032 per share, respectively.
Second-Quarter Performance
Consolidated net sales were $1,637.7 million in the second quarter of 2016, an increase of 3.7% versus the second quarter of 2015. Excluding the effect of foreign currency translation, a 0.8 point headwind, net sales increased 4.5% versus the year ago period. Volume was a 3.1 point contribution to sales growth and slightly greater than forecast due to the timing of shipments in North America. As expected, net price realization was 0.9 points favorable as direct trade and returns, discounts and allowances in the International and Other segment were less than last year. Acquisitions were a 0.5 point benefit in the second quarter.
Adjusted gross margin was 45.5% in the second quarter of 2016, compared to 46.7% in the second quarter of 2015. The 120 basis point decline was driven by higher commodity and other supply chain costs and unfavorable sales mix, partially offset by supply chain productivity and costs savings initiatives.
Total advertising and related consumer marketing expense increased about 5% versus the second quarter of 2015. For the full year, the combined investments of advertising and related consumer marketing expense, as well as direct trade in North America, are expected to increase, supporting new product launches and in-store merchandising and display activity. Selling, marketing and administrative (SM&A) expenses, excluding advertising and related consumer marketing and the barkTHINS acquisition, declined about 2.6% in the quarter, driven by the previously mentioned increase in our annual productivity and cost savings target as well as the initiative announced in June of 2015. As a result, consolidated adjusted operating profit of $295.6 million in the second quarter of 2016 increased 2.1% versus the second quarter of 2015.
As expected, the second-quarter adjusted tax rate of 31.4% was lower than the prior year period of 35.3%, largely as a result of investment tax credits. However, due to timing differences, the corresponding book expense for a portion of the credit investments will not be recognized until the second half of the year. In the first half of 2016, the company repurchased $420 million of outstanding shares, resulting in diluted shares outstanding of 214.5 million at the end of the second quarter of 2016, compared to 219.6 million for the same period of 2015.
Outlook
“Over the remainder of the year we believe our mix of new products and in-store programming will bring the right level of excitement, variety and news to the category,” Bilbrey continued. “We’re particularly excited about the upcoming launch of Reeses Pieces Peanut Butter Cups, Krave Meat Bars and a yet to be announced Snackfection item in the fourth quarter. We’ll also continue to rollout the Kit Kat Big Kat, Reese’s Snack Mix and Hershey’s Snack Bites products. Additionally, in the fall, our simple ingredients advertising campaign begins on Hershey’s Milk Chocolate Bars and Hershey’s Kisses Milk Chocolates manufactured with fresh milk from local Pennsylvania farms, cocoa beans sourced responsibly from West Africa, pure cane sugar and natural flavors. We’ll also have greater levels of in-store merchandising and displays as we leverage large promotional events such as the Summer Olympics and Reese’s NCAA Football College Game Day. In the second half of the year in China, distribution gains in smaller format stores will continue and a new advertising campaign on Hershey’s Milk Chocolate Bars and Hershey’s Kisses Milk Chocolates will begin.”
The company estimates that full-year 2016 net sales will increase around 1.0%, including a net benefit from acquisitions and divestitures of about 0.5 points and the impact of unfavorable foreign currency exchange rates of one point. Constant currency net sales growth of around 2.0% is less than the previous estimate of about 2.5% primarily due to our expectation of lower U.S. CMG category growth over the remainder of the year and macroeconomic challenges in China impacting purchasing behavior. The company expects gross margin to be slightly below last year due to unfavorable sales mix and higher commodity costs. Business productivity and cost savings programs are on track with our targets. As a result, the company expects adjusted earnings per share-diluted for 2016 to increase 3.0% to 4.0%, including barkTHINS dilution of five- to six-cents per share, and be in the $4.24 to $4.28 range.
North America (U.S. and Canada)
Hershey’s North America net sales were $1,444.8 million in the second quarter of 2016, an increase of 3.2% versus the same period last year. Excluding the 0.3 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 3.5%. Volume was a 4.5 point contribution to sales growth, slightly greater than forecast due to timing of shipments. Net price realization was off 1.6 points, as anticipated, due to higher levels of direct trade supporting in-store merchandising and display and related promotional price points. The barkTHINS acquisition was a 0.6 point benefit in the second quarter of 2016.
Total Hershey U.S. retail takeaway for the 12 weeks ending July 9, 2016, in the expanded all outlet combined plus convenience store channels increased 0.5%, with market share off 0.1 points. For the 12 weeks ending July 9, 2016, Hershey’s U.S. CMG market share was 30.8%, a decline of 0.7 points versus the same period last year.
North America segment income declined 7.6% to $425.7 million in the second quarter of 2016, compared to $460.7 million in the second quarter of 2015. The decline in segment income was driven by lower gross margin due to higher levels of direct trade, unfavorable sales mix, increased commodity costs and a 10.6% increase in advertising and related consumer marketing expense.
International and Other
Second-quarter net sales for Hershey’s International and Other segment increased 7.6% to $192.8 million. Net price realization was a 20.3 point benefit as direct trade and returns, discounts and allowances in China were less than the same period last year. Volume was off 7.2 points due to the previously stated discontinuance of edible oil products in India and declines in China that were in line with estimates. Unfavorable foreign currency exchange rates were a 5.5 point headwind. Combined second-quarter constant currency net sales in Mexico and Brazil increased nearly 13% driven by solid Hershey’s marketplace performance. As expected, China gross sales declined in line with expectations due to the challenging macroeconomic and competitive environment. China chocolate category retail sales sequentially improved in the second quarter versus the trends in the first quarter and second half of last year.
International and Other segment loss of $3.5 million compares to segment loss of $44.5 million in the second quarter of 2015. Combined income in Latin America and export markets improved versus the prior year and performance in China benefited from lower direct trade as well as returns, discounts and allowances which were lower than the prior year.
Unallocated Corporate Expense
Hershey’s unallocated adjusted corporate expense in the second quarter of 2016 was $126.6 million, a decline of $0.2 million versus last year. Savings from the previously mentioned productivity and cost savings initiatives were partially offset by the timing of employee-related costs and other corporate fees.
Live Webcast
At 8:00 a.m. ET on July 28, 2016, Hershey hosted a conference call to elaborate on second-quarter results.
