HERSHEY, PA. — Unexpectedly soft demand in China and a shorter Easter season soured the Hershey Co.’s first-quarter performance. The company had net income of $244,737,000 for the period ended April 5, or $1.14 per share on the common stock, which was down 3.1% from $252,495,000, or $1.16 per share, in the prior-year period. Net sales rose to $1,937,800,000, up 3.5% from $1,871,813,000.
While seasonal sales, which represent about one-fourth of Hershey’s business in the first quarter, declined year-over-year due to the timing of the Easter holiday, the company’s core brands increased mid-single digits on a percentage basis over the prior year.
“I tell you the one thing… from the first quarter that I feel better about than anything else we probably could talk about on this call, is that we have seen a strengthening in our everyday business,” said John P. Bilbrey, chairman, president and chief executive officer, during an April 23 earnings call with financial analysts. “Our everyday brands are up, and importantly that’s always a measure of advertising effectiveness.”
Hershey’s net sales in North America rose 2.9% to $1,707 million in the quarter, which reflected the benefit of pricing and a decline of seasonal confectionery sales due to the shift in timing of Easter. Operating income increased 2.9% to $554.3 million, pressured by the timing of Easter and an increase in advertising and selling expenses.
Excluding Easter sales, retail takeaway of candy, gum and mints for the 12 weeks ended March 21 advanced 3.1% year-over-year.
“If you look at the quarter, Reese’s was up about 0.9 of a point, Hershey’s up 2.4%, Kit Kat was up 3.6%, Kisses up over 9%, and Brookside was a big number and because it is a new brand it may not be meaningful to talk about it, but it was a big number,” Mr. Bilbrey said.
And he expects the momentum to continue in the second quarter. Hershey is set to introduce Ice Breakers Cool Blast Chews, Hershey’s Caramels, new Lancaster crème caramel varieties and seasonal Twizzlers flavors.
“Remember, we talked about (how) we were going to try to be very focused against merchandising against our core and big brands, making sure they were available to consumers,” Mr. Bilbrey told analysts. “That appears to be working for us.”
Improving consumer confidence in North America may also have contributed to gains in Hershey’s core portfolio.
“Just broadly, as I have been out and about talking to retailers and have listened to other manufacturers is, people are saying that they believe the basket is more constructive than they have seen for a while, so that strengthening of the basket is also probably a really good sign for the overall industry,” Mr. Bilbrey said.
Overseas, however, results were not as encouraging. Hershey’s net sales in its international and other segment rose 8.5% to $230.8 million, pressured by unfavorable foreign currency exchange rates and unanticipated weakness in the consumer packaged goods sector in China, where Hershey’s first-quarter net sales declined 47% versus a year ago.
“Chocolate was one of the few categories in China that grew in the first quarter, although less than last year,” Mr. Bilbrey said. “In China, Hershey slightly outpaced the category and gained market share, however, the pace of growth slowed significantly.”
For 2015, management expects full-year net sales to increase 4.5% to 5.5%, including a net benefit from acquisitions and divestitures and the negative impact of unfavorable foreign currency exchange. The company has reaffirmed full-year adjusted earnings per diluted share growth of 8% to 10%, including dilution from acquisitions and divestitures of 3c to 5c per share. Hershey acquired Krave Jerky on March 19 and completed the sale of its Mauna Loa macadamia nut business to Hawaiian Host, Inc. on Feb. 27.
“While we remain confident in our business plans, a narrowing of the sales range reflects the global macroeconomic challenges that continue to persist,” said Mark Pogharian, vice-president of investor relations. “The decline of the lower end of the range by 0.5 primarily reflects the first quarter China underperformance.”
The company expects net sales growth in China to sequentially improve over the course of the year.“We have adjusted our China plans to generate greater in-store activity, support faster growth in the hypermarkets,” Mr. Pogharian said. “We will be entering some tier-two cities and we have plans to increase our exposure in the fast growing e-commerce channel.”