October 26, 2017 / 11:56 AM / a year ago

Hershey's profit tops estimates on Kit Kat sales, lower costs

(Reuters) - Hershey Co’s (HSY.N) profit and revenue topped analysts’ estimates in the third quarter as it sold more Hershey’s Kisses and Kit Kat, and as lower cocoa prices and cost-cutting efforts offered a boost.

FILE PHOTO: Containers of Hershey's chocolate syrup are seen on display in a shop in New York City, U.S., July 20, 2017. REUTERS/Mike Segar

The U.S. candy maker said on Thursday sales in North America, which make up the bulk of its revenue, rose 1.6 percent to $1.79 billion in the quarter ended Oct. 1, helped by Kisses and Kit Kat and the launch of items such as Chocolate Dipped Pretzels.

That helped offset weaker performance in other brands and lower market share in convenience stores, according to statements during an investor conference call and Securities and Exchange filings.

Global food manufacturers have been struggling with weakening growth as consumers seek healthier foods. Pennsylvania-based Hershey has been boosting its portfolio in snacks, which are typically lower-margin products than candy.

After being up in early trade, share prices dropped more than 3 percent. They were traded down 3.2 percent at $105.09 apiece by 10:56 a.m. EDT (1456 GMT).

A drop in cocoa prices helped profits, alongside a cost-cutting plan Hershey began implementing last year and layoffs announced earlier this year. Cost of sales fell 5.2 percent to $1.09 billion in the third quarter.

Cocoa prices, estimated to make up about 10 to 15 percent of Hershey’s cost of goods, has fallen more than 30 percent since last summer and could continue to decline in the next few years, analysts have said.

Hershey’s net income rose 20 percent to $273.3 million or $1.28 per share in the quarter. Net sales rose slightly to $2.03 billion and inched past analysts’ expectations of $2.01 billion.

Still, gross margins were down as higher freight, new packaging and customer service costs dragged, the company said.

Excluding one-time items, Hershey earned $1.33 per share, beating analysts’ average estimate of $1.29, according to Thomson Reuters I/B/E/S.

Amid pressure for price cuts and healthier products, the global food business has seen a flurry of mergers and acquisitions.

Just over a year ago, Hershey Co fought off a $107-per-share takeover offer from Mondelez International Inc (MDLZ.O). Now, the Pennsylvania candy maker is reported to be looking to buy Nestle’s U.S. candy business.

When asked about acquisitions on the call, Chief Executive Officer Michele Buck said the company is continuing see mergers and acquisitions as part of its strategy.

“We’re particularly interested in companies with accelerating revenue growth ... primarily within the U.S. $100 billion snack wheel,” she said.

Reporting by Sruthi Ramakrishnan in Bengaluru and Chris Prentice in New York; Editing by Sai Sachin Ravikumar and Bill Trott

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