Hershey acquired an 80% stake in Shanghai Golden Monkey for approximately $394 million a year ago and is scheduled to acquire the remaining 20% stake next month.

HERSHEY, PA. — The Hershey Co.’s investment in China has produced sour results. For the second quarter ended July 5, Hershey reported a net loss of $99,941,000, which compared with net income of $168,168,000, or 78c per share on the common stock, for the prior-year period. Results included an impairment charge of $249.8 million following an assessment of Hershey’s Shanghai Golden Monkey business, which has performed below expectations.

Net sales for the quarter were relatively flat at $1,578,825,000 from year-ago sales of $1,578,350,000.  Excluding unfavorable foreign currency translation, the company said net sales increased 1.3%.

Hershey acquired an 80% stake in Shanghai Golden Monkey for approximately $394 million a year ago and is scheduled to acquire the remaining 20% stake next month. The company makes Golden Monkey candy, chocolates, protein-based products and snack foods that are marketed across the company in cities and rural areas. At the time of the acquisition, Hershey said it expected China would become its second largest market by the end of 2015 with net sales of approximately $500 million on a constant currency basis.

J.P. Bilbrey, chairman, president and c.e.o. of Hershey.

“As we've indicated previously, we acquired the Golden Monkey business to broaden our footprint in China, by leveraging both the sales force and the regional and local distributor network in order to diversify Hershey's chocolate growth, which has historically been leveraged to tier-one hypermarkets,” said J.P. Bilbrey, chairman, president and chief executive officer, during an Aug. 7 earnings call with financial analysts. “Results have been disappointing. We initially thought this was primarily due to macroeconomic headwinds in China.”

Although softness in the Chinese market has hurt Hershey’s results, the company identified significant issues within the Golden Monkey business that are hindering performance.

“Our assessment of the distributor network has made it clear that the network is not as stable as we believed, and therefore the related retail customer reach is not as broad as we believed it to be,” Mr. Bilbrey said. “As a result, the sales forecast for the business in 2015, around $90 million is less than our initial expectations of at least $200 million.”

Still, the company said it remains committed to the long-term success of the acquisition and the Chinese market. Hershey has named a new chairman and general manager for Golden Monkey with strong China consumer packaged foods experience and is evaluating cost structure and different integration strategies to improve the business’ performance.

“We'll continue to assess and address these issues and their impact on the value of the business, as we work towards acquiring the remaining 20% of the business which we now anticipate will occur in the fourth quarter of 2015,” Mr. Bilbrey said. “The timing and terms of the second closing will be informed by the results of our ongoing assessment.”

In response to the macroeconomic challenges tempering the chocolate category’s performance in China, Hershey is focused on a broader roll-out of Brookside chocolates, distribution into smaller format stores and acceleration of the e-commerce business.

North America net sales benefited from the recent acquisition of Krave jerky.

The company said U.S. results were slightly better than expectations, reflecting an increase in year-to-date candy, mint and gum market share offset by snacks and grocery softness due to increased competitive activity in spreads and baking chips. North America net sales also benefited from price increases on chocolate products and the recent acquisitions of Krave jerky and Allan Candy.

Hershey executives expressed confidence that financial results will improve through the remainder of the year on higher prices for chocolate products, Halloween and holiday seasonal programs, and new product innovation, including the continued roll-out of Kit Kat White Minis, Hershey’s Caramels and Ice Breakers Cool Blasts, as well as the launches of Brookside Fruit and Nut Bars, Hershey’s Kisses Deluxe, Reese’s Snack Mix and Hershey’s Snack Bites.

For the first half of the year, Hershey had net income of $144,796,000, or 67c per share, down 66% from $420,663,000, or $1.94 per share, for the same period of the previous year. Net sales were $3,516,625,000, up 1.9% from $3,450,163,000.

Looking ahead, the company estimates full-year net sales to increase 1.5% to 2.5%, or 3% to 4% excluding unfavorable currency translation. Hershey executives initially had estimated full year company sales would increase 6% to 7%. Hershey anticipates adjusted diluted earnings per share to be in the $4.10 to $4.18 range, an increase of 3% to 5% over the previous year, including dilution from acquisitions and divestitures. Hershey said it expects to achieve $10 million to $15 million in savings related to new productivity efforts announced in June.