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This note was originally published April 25, 2013 at 13:52 in Consumer Staples

HSY reported first quarter earnings this morning. The company is largely on track, growing in all categories across multiple channels, including club, and has good marketing support behind the launch of Brookside (dark chocolate, wellness). Second quarter will be challenged based on tougher comps in a historically weaker quarter. Volume should drive performance in the year in which HSY expects a 12% gain in earnings per share (EPS). We like the story, but would prefer a better entry point - perhaps second quarter concerns and performance provide it.   

What we liked:

  • Revenue slightly missed consensus $1.83B vs $1.84B, but up a healthy 5.5% (Volume +5.3%; Price +0.5%; FX -0.3%)
  • EPS of $1.09 beat estimates of $1.04, up 13%, and fiscal year guidance adjusted up to $3.61-$3.65 vs previous $3.56-$3.63 - first quarter guidance increases are rare
  • Gained market share in every category that it competes in
  • Higher dollar sell-through for Easter despite shorter season
  • Gross margin +2.4% in the quarter on lower commodity costs of $35MM and supply chain efficiencies
  • Strong brand support for Brookside
  • Focused on continued expansion to emerging markets (China, Brazil, India, and Eastern Europe)

What we didn’t like:

  • Q2 is historically a weaker quarter and is facing higher tax rate and more difficult comps
  • Valuation, though more easily supported in the case of HSY given its growth profile and categories than for the balance of the staples group