Will Hershey (HSY) Beat or Miss Q2 Earnings as Costs Rise?

The Hershey Company HSY is set to report second-quarter 2014 results on Jul 24, before the market opens. Last quarter, the company delivered a negative earnings surprise of 0.86%.

Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

Last week, the chocolate giant announced that it expects the fiscal 2014 results to be at the lower end of its previous target. Rising costs of Hershey's key ingredients like dairy, nuts, cocoa and sugar are expected to dent its margins which prompted the guidance cut. The costs of other inputs — packaging, fuel, utilities and transportation — are also rising.

The maker of Reese's, Kit Kat and Ice Breakers raised wholesale prices by approximately 8%, effective Jul 15, across its instant consumable, multi-pack, packaged candy and grocery lines. However, management does not expect the price hike to have any material positive impact on 2014 results. According to Hershey, most of the benefit from price increases will not materialize until the Halloween buying season in 2015.

However, in anticipation of volume elasticity due to price rises, management lowered its 2014 top-line expectations. Moreover, 2014 gross margins are expected to decline slightly from the year-ago levels due to greater-than-anticipated commodity cost headwinds.

Management also released unimpressive preliminary numbers for the second quarter. For the second quarter, management expects net sales to increase around 4.5%, including currency headwind of approximately 0.75 point. Adjusted earnings per share are expected in the range of 75 to 77 cents.

Earnings Whispers?

Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zero Zacks ESP: The Earnings ESP is 0.00%.

Zacks Rank: Hershey has a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank are:

The J.M. Smucker Co. SJM with Earnings ESP of +1.46% and a Zacks Rank #3 (Hold).

Dr Pepper Snapple Group, Inc. DPS with an Earnings ESP of +3.30% and a Zacks Rank #3.

Energizer Holdings, Inc. ENR, with Earnings ESP of +1.29% and a Zacks Rank #3.