HSY – Beware C-Store and Commodity Headwinds in 2H

07/24/14 01:10PM EDT

Hershey reported Q2 results that were largely in line with consensus -- $1,578.4M of sales rose 4.6% Y/Y (excluding FX), a sequential improvement vs 2.4% in Q1, but the company signaled weaker in-store activity and will likely face increasing commodity cost pressure in 2H.  EPS of $0.76 rose 5.6%, albeit off the easier comp of the year.  

HSY cited weakness in the quarter from the C-store channel on a continued challenged macro environment that’s impacting consumer spending and higher levels of in-store competition.

The stock is trading down -2% intraday on the release and is down over 14% since its ytd high in late February. The market’s discount has come alongside the company’s strategy of volume driven sales. This strategy changed last week when the company issued an 8% price increase across all of its products, citing increased commodity costs, in particular from dairy costs (note: Mars raised pricing ~ 7%). 

Commodity cost pressure remain square on our radar. In the quarter, the company saw a 230bp decline in GM – and for the remainder of the year expects these costs to be a headwind to GM on the year, falling hardest in Q3.  Below we show longer term charts of milk and cocoa, each up 15% and 13%, respectively ytd, that should also pressure results.

HSY – Beware C-Store and Commodity Headwinds in 2H - z. milk

HSY – Beware C-Store and Commodity Headwinds in 2H - 2. hsy

The company stressed its 2H plan for increased innovation (beyond what was previously planned) to make up for weakness seen in the quarter, but we think there’s a threat to the business in the back half of the year as many of the issues cited in the quarter continue to play out: weak macro environment; commodity cost inflation; impact of a price hike on demand; and increased shelf space competition.  Any hiccups with advertising and promotion to reach the consumer will also be a negative drag. 

Further, and as we show below, comps get more difficult on the top and bottom lines as we move out over the next 2-3 quarters.

HSY – Beware C-Store and Commodity Headwinds in 2H - 3. hsy

HSY – Beware C-Store and Commodity Headwinds in 2H - 4 hsy

We’re cognizant that HSY is entering the holiday-rich second half of the year in the U.S. that could help to make up for underlying weaknesses. However, the business is also experience weakness internationally. In the quarter, international sales were up 7%, however China slowed sequentially and Mexico sales were down -5% Y/Y due to FX headwinds. Taken together, there are winds blowing against the company across all of its regions.

We are not currently involve in HSY in our Real Time Alerts portfolio, but our quantitative levels below suggest a bearish TRADE and TREND outlook on the stock. 

HSY – Beware C-Store and Commodity Headwinds in 2H - 5. hsy

Howard Penney

Managing Director

Matt Hedrick


Fred Masotta


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