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HSY’s 4Q2012 adjusted EPS of $0.74 missed Bloomberg consensus by a penny with the main drag coming from a +19% increase in SG&A (excluding marketing), which was above initial estimates.

For its important Halloween and Christmas quarter, organic sales grew +9.3% (price +2.3%, volume +7.0%), and net sales rose +11.7% inclusive of the Brookside acquisition (+2.1%) and +0.3% of FX).  Gross margin improved +140bps to 43.1%.

We came into the print saying that HSY, at 21.4x ’13 EPS, was expensive but had very good business momentum, and the quarter largely proved this out across its Chocolate, Non-Chocolate, Mint, and Gum segments.

 

The company’s outlook for 2013:

  • Net sales growth of 5 to 7%, including FX, unchanged versus previous estimates
  • Adjusted Gross Margin expansion of 180 to 200 bps, driven by “productivity, cost savings initiatives and overall input cost deflation.”
  • Advertising expected to increase 20% with a larger share going to Brookside and China
  • Adjusted EPS growth of 10 to 12% versus previous guidance of 8 to 10%, or EPS of  $3.47-$3.56 versus consensus at $3.60

We think the name finds buyers on any pullback (HSY is up +1.6% intraday).  We don’t find its 2013 sales growth target particular challenging which could lend to upside surprises. In 2013 we could expect the USA to grow around +4%, to get +1 point from innovation, and +2% from international, which very quickly takes you to the top end of its guidance range. The company last took a major price increase in 2011. We suspect HSY, like many of its peers, will see larger volume gains as pricing comes in. We are bullish on HSY getting more shelf space internationally, especially in China, and expect continued sticky consumption from its convenient store channel despite such headwinds as an increase to the payroll tax.

Call with questions.

Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matthew Hedrick

Senior Analyst