October 25, 2018 / 11:34 AM / in 24 days

Hershey's sees margin pressures easing in 2019 after disappointing quarter

(Reuters) - Hershey Co (HSY.N) said on Thursday price hikes to be implemented next year would ease margin pressures, after lower prices and higher transportation and packaging costs dented quarterly profits for the Kisses and Reese’s chocolate maker.

FILE PHOTO: Hershey's chocolate bars are shown in this photo illustration in Encinitas, California January 29, 2015. REUTERS/Mike Blake/File Photo

Shares of the company fell 7 percent in morning trading, also weighed down by a sales miss and an in-line profit.

U.S. packaged goods makers like Hershey have been pressured by a jump in freight costs, fueled by a dearth of drivers, higher diesel prices and new regulations for truckers.

Hershey was also weighed down by a 1.2 percent cut in prices on average to boost volumes in the face of consumers shifting away from sugary products.

The company’s adjusted gross margin fell 130 basis points to 44 percent in the third quarter.

Hershey in July said it would raise prices by an average of 2.5 percent to reduce pressure on profits, while also cutting and redesigning its packages.

“We do believe that we will be making improvements on margins as we exit 2018 and as we go in to 2019,” Chief Executive Officer Michele Buck said on a post-earnings call.

Chief Financial Officer Patricia Little said the company expected retail shelf prices to increase on about 20 percent of its portfolio.

The company continued to expect full-year net sales to grow at the low end of a 3.5 percent to 5.5 percent range, with organic sales growth slightly up. Hershey also kept adjusted earnings forecast of $5.33 to $5.43 per share intact.

Total sales in North America, its biggest market, rose 2.9 percent to $1.84 billion, as the company benefited from its acquisitions of snacking companies such as SkinnyPop popcorn maker Amplify Snack, beef jerky maker Krave and barkTHINS.

“While Hershey saw increases in the number of products sold in North America, this was more than offset by declines in pricing,” Brittany Weissman, consumer analyst at Edward Jones said in a note. “We believe the environment remains very competitive, and Hershey is having to spend more to grow sales.”

Total sales rose 2.3 percent to $2.08 billion but fell short of the average analyst estimate of $2.09 billion.

Sales in international markets fell 1.9 percent to $236.1 million, largely weighed down by the sale of its Shanghai Golden Monkey business in China.

Excluding items, Hershey earned $1.55, in line with average estimate.

Hershey’s shares were down 6.2 percent at $101.43 in morning trading, marking its worst day in more than two years.

Reporting by Soundarya J in Bengaluru; Editing by Saumyadeb Chakrabarty

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