Hershey's Challenges Are Intensifying, Says UBS

Hershey Co HSY reported its F2Q EPS ahead of the consensus, while lowering its sales guidance for 2016.

UBS’s Steven Strycula maintains a Neutral rating on the company, with a price target of $107.

Guidance Cut

Strycula mentioned that the F2Q beat EPS of $0.85 was driven by cost savings and a favorable revenue shift from 3Q to 2Q.

However, the company lowered its guidance to 1.5 percent organic sales growth from the earlier 2 percent, ex-FX, driven by slowing U.S. CMG and China trends.

The EPS guidance was left unchanged at $4.24–$4.28, suggesting improved margins, the analyst stated.

Hershey’s market share grew 10 bps in North America, while international trends were mixed.

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According to the UBS report, “Mgmt expects improving sales in 2H16 w/added "snackfection" capacity in 3Q & new product sell-in for 4Q.”

Strycula believes the company’s revised top-line guidance implies North American sales acceleration to 1.5–2.0 percent organic growth in 2H16, from a decline of 1.5 percent in 1H16.

“While we appreciate HSY's plan to step-up ad spend and launch new product in 2H16 we still don't view Hershey's revenue guidance as conservative,” the analyst said.

Challenges Intensifying

Strycula pointed out that the U.S. consumer preference was shifting rapidly to newer food snacking alternatives, while U.S. retail merchandise was shrinking, emerging markets slowing and international competition was intensifying.

The analyst believes Hershey needs to “reinvest more into better-for-you snacking and Int'l infrastructure, while industry peers are cutting expenses to raise margins.”

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