HERSHEY, PA. — The Hershey Co. will plan for stock-keeping unit (s.k.u.) rationalization in the United States after gross margins proved disappointing in the first quarter ended April 1.
“This is really focused on looking at the broad core confection, all the brands, all the pack types we have and actually all the merchandising units as well,” said Michele G. Buck, president and chief executive officer, in an April 26 earnings call. “So it’s really more focused on optimizing that, making sure that we are as focused as possible on driving the core and making the decisions to have the highest velocity items on the shelf everywhere we possibly can.”
Convenience store trends in the quarter were lighter than Hershey anticipated, which affected mix, she said. Some of the company’s bigger, more value-oriented packs performed the best, which created an unfavorable mix.
Hershey had anticipated gross margin contraction in the first quarter because of higher freight and logistics costs as well as incremental investments in trade and packaging, Ms. Buck said.
“However, this contraction was greater than we expected due to unfavorable mix, cost of complexity via incremental supply chain touch points and waste as well as higher input costs,” she said. “Overall, first-quarter gross margin declined 260 basis points compared to the prior year period.
“As a result, we are now expecting full year gross margin to decline around 125 basis points versus prior year. You have heard us comment over the years that we are a gross-margin-focused company, so reversing these declines is a high priority for us and is central to driving profitable growth. We are taking swift action to mitigate these challenges.”
Besides s.k.u. rationalization, Hershey will increase its supply chain capacity and flexibility, and the company will invest in improved forecasting tools by shifting planned tax reinvestment spend from selling, general and administrative expenses to capital expenditures.
“We expect gross margin to begin to improve and expand as we enter 2019 based on these new initiatives, combined with our ongoing continuous improvement and strategic revenue management capabilities,” Ms. Buck said.
Hershey posted net income of $350.2 million, equal to $1.71 per share on the common stock, in the quarter, which was up 280% from $125 million, or 60c per share, in the previous year’s first quarter. Adjusted net income, which did not include items impacting compatibility, was $298 million, which was up 7% from 279.3 million in the previous year’s first quarter.
Net sales rose 4.9% to $1,972 million from $1,879.7 million. Acquisitions provided a 3.4-point benefit. Hershey expects the acquisition of Amplify Snack Brands, Inc. to be 8c to 12c e.p.s. accretive in 2018, Ms. Buck said.
Hershey’s Gold bars, which launched last November, performed well.
“Hershey's Gold is off to a great start, and trial and repeat are encouraging,” Ms. Buck said. “Importantly, we are leveraging this launch to not only bring excitement but also to drive additional merchandising growth on our core base business as well. New pack types are shipping now to deliver on more consumer usage occasions and drive incremental growth.”
A Reese’s Outrageous Bar will launch in May.
“Our retail partners and consumers are excited for this new twist that builds upon the success of our Reese’s Pieces Peanut Butter Cup launch by adding Reese’s Pieces to our Reese’s Outrageous bar,” Ms. Buck said.
In North America, income of $534.4 million was down 3.3% from $552.8 million. Sales of $1,751.7 million were up 4.4% from $1,677.1 million. In International and Other, income of $17.7 million compared with $1.7 million in the previous year’s first quarter. Net sales increased 9% to $220.3 million from $202.5 million.
Hershey companywide now expects full-year earnings per diluted share to be in the range of $4.73 to $4.98, which is up 2c from the previous estimate. An increase in full-year net sales is expected to be toward the low end of the previously expected range of 5% to 7%. The new forecast includes an approximate 5-point benefit from the Amplify acquisition.
The U.S. Tax Cuts and Jobs Act of 2017 will have a favorable impact on the company’s net income, diluted earnings per share and cash flow. Because of the tax cut benefit, Hershey will increase capital spending by $25 million. Total capital additions, including software, now are expected to be $355 million to $375 million.