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We’re sticking with what works when it comes to sweets. We’ve liked HSY over the last two quarters and yesterday’s Q4 results underlined its impressive story and informs our bullish outlook over the intermediate term.

Q4 was favored with the timing of Halloween and the holidays falling in the quarter: revenue of $1.96B (+11.7% Y/Y) beat expectations of $1.89B, and EPS was in-line with consensus at $0.86 and grew 24% Y/Y. Adjusted gross margins grew 80bps to 43.9% in the quarter and EBIT margin of 15.8% grew 140bps versus the prior-year quarter.

For the year, HSY grew sales 7.6% (it has captured >7% growth over the last 4 consecutive years -- not bad for a CPG company) and in the U.S. reclaimed its Candy, Mint, Gum (CMG) category leadership moving to a 31.1% market share., with strength in Candy and Mint offsetting weakness in Gum.

Its international story continues to be one that’s picking up steam: the Company grew chocolate sales in China +14% to broaden its market share to 10.2% (it was the fast growing chocolate company in country) and in Mexico improved its market share by 2% to 21%. We continue to applaud HSY’s strategy to invest to grow and diversify beyond the U.S. Given the macro headwinds across the emerging market, the results are encouraging.  Going forward we expect Asian sales to be further supported by last quarter’s announcement of a $250MM cap-ex spend to build a new plant in Malaysia to supply markets in Asia and assist existing capacity in China. 

According to company commentary, commodity inflation should be mild in 2014 across its broader basket (dairy being the one unknown with little visability) and in-line with our macro team’s Q1 Macro Theme of #InflationAccelerating.

For 2014, the company reaffirmed its FY EPS guidance of 9-11% growth or $4.05 - $4.13; net sales growth of 5-7%; and gross margin expansion of 50bps.

From a quantitative set-up HSY is comfortably trading above its intermediate term TREND level, confirming our bullish outlook:

HSY – Sticking With the Sweet Tooth - w. hsy

Matt Hedrick