Hershey's profit beats estimates, price hikes help

CHICAGO (Reuters) - Hershey Co HSY.N posted a higher-than-expected rise in quarterly profit on Thursday as the chocolate maker increased its market share despite raising prices.

Rows of Hershey candy bars are seen inside the Hershey Store in New York in this June 17, 2008 file photo. REUTERS/Shannon Stapleton

The maker of Hershey’s Kisses and Reese’s Peanut Butter Cups also stood by its forecast calling for earnings per share to increase this year, but for the gain to be less than the company’s long-term goal of 6 percent to 8 percent.

Hershey took a 10 percent price increase in August to help offset rising costs for commodities such as cocoa.

While the price increase helped lift profit in the quarter, the company expects to see a greater impact later this year, since it had to honor earlier pricing agreements with retailers on candy for the Valentine’s Day and Easter seasons.

Hershey said the price increase did not hurt volume as much as expected in the first quarter. It is also spending more to support its brands as prices go up, with advertising costs expected to rise 20 percent to 25 percent this year.

The company has also been trying to gain market share against rivals like Mars Inc, which bought Wm Wrigley Jr Co in October to become the world’s largest confectionary company.

Consumers have also shifted more to mainstream chocolates from premium brands, a move that has helped Hershey.

“Obviously, they sell a lot more product in that mid-to-low-priced range,” Edward Jones analyst Jack Russo said.

Hershey said first-quarter profit rose to $75.9 million, or 33 cents a share, from $63.2 million, or 28 cents a share, a year earlier.

Excluding one-time charges from the overhaul of Hershey’s supply chain, earnings were 38 cents a share, up from 37 cents a year earlier. Analysts on average had forecast 35 cents, according to Reuters Estimates.

Hershey said its U.S. market share rose 0.5 percentage points in retail channels where such data is monitored.

First-quarter sales rose to $1.24 billion from $1.16 billion and exceeded the analysts’ average estimate of $1.19 billion.

Hershey said in January that higher costs for commodities like cocoa and sugar, rising pension costs and weak consumer spending would weigh on 2009 results.

While dairy costs have so far been lower than the company anticipated, Hershey said it still expected significant commodity and pension costs increases this year.

If dairy prices remain at current levels throughout the year, Hershey said commodity costs could rise less than the $175 million that it had previously forecast for 2009.

“The company has pricing in place along with commodity trends that will allow it to step up promotions and maintain/gain market share while allowing it to hit consensus (earnings) numbers,” UBS analyst David Palmer said in a research note.

Still, Palmer rates Hershey stock at “neutral” and Russo rates it at “hold” due to its valuation.

The stock trades at about 18.5 times estimated 2009 earnings per share, compared with a 12 to 13 multiple for food company peers, Palmer noted.

Hershey shares were up $1.16, or 3.2 percent, at $37.22 on the New York Stock Exchange.

Reporting by Brad Dorfman; Editing by Derek Caney and Lisa Von Ahn