Hershey 2Q profit rises, as do its expectations

AP News
Posted: Jul 26, 2011 5:41 PM
Hershey 2Q profit rises, as do its expectations

After yet another strong quarter for Hershey, the nation's second-largest candy maker raised its outlook for the full year Tuesday, even as analysts questioned its strategy to become a global company.

Shares of The Hershey Co. struck a nearly 6-year high in morning trading after the company, based in Hershey, Pa., posted its fourth quarter in a row of profit growth and predicted that sales will rise by 6 percent and earnings will jump by 10 percent this year.

Sales rose 7.5 percent compared to last year's second quarter, extending Hershey's string of three strong years of results after it began pumping huge new sums into marketing efforts to reverse skidding sales.

Hershey is famous for its chocolate bars, Hershey's Kisses and Reese's peanut butter cups, but most of those sales are in the United States and Canada, which are considered relatively slow-growing _ though large _ markets.

Hershey is increasingly competing with larger rivals, such as Kraft Foods Inc., to grab customers in China, India and other heavily populated countries where sales are growing more quickly and expanding middle classes are buying more luxuries.

Hershey's new CEO and president, John P. Bilbrey, told analysts on a conference call that he will focus on the company's international expansion.

"If I look back on what I hope to be able to leave as a legacy, it's that we've got the right international footprint and portfolio for the next areas of growth and that's how I'm going to spend a lot of my time," said Bilbrey, who was promoted just six weeks ago when David J. West departed.

Analysts pressed Bilbrey for details on a joint venture in India, citing press reports there that it is ending. And they asked whether Hershey had bid on Chinese candy maker Hsu Fu Chi International.

Bilbrey would not say whether Hershey had bid _ Swiss food giant Nestle SA said two weeks ago that it is buying a majority stake in Hsu Fu Chi. And he would not say whether Hershey will maintain a joint venture in India with Godrej Industries Ltd.

However, Bilbrey said Hershey remains devoted to China and India, and that he wants to accelerate the company's sales in those countries, through acquisition if necessary.

Some analysts say Hershey is losing ground to its rivals every time one of them acquires another company. Meanwhile, Hershey has chosen thus far to work through joint ventures in China and India.

Frost & Sullivan analyst Christopher Shanahan suggested that Hershey is having a rough time breaking into fast-growing foreign markets, saying that it sometimes promotes products in new regions without trying to solve the fundamental problem of competing with incumbent manufacturers there.

"In the long run, it's all a matter of watching their global strategy, but in the short-term, this is a good company in terms of a place to put your money," Shanahan said.

Bilbrey agreed Hershey has made some tactical errors. It has learned some lessons in India, he said, citing missteps with a chocolate sugar confectionery brand.

But Edward Jones analyst Jack Russo said in a note to investors Tuesday that he expects Hershey's sales in China, Brazil and India to grow a combined 20 percent to 25 percent this year and alleviate some concern over its limited international revenue.

In the U.S., people continue to buy sweets, despite the tug of inflation that has threatened almost every industry, from clothing to appliances.

Hershey nearly tripled its second-quarter profit, largely because of one-time costs that dampened profits a year ago. Second-quarter profit hit $130 million, or 56 cents per share. Analysts had expected 55 cents per share.

The company cited higher prices, better foreign currency exchange rates and some earlier-than-expected orders, as well as momentum from the recent launch of new products.

Revenue rose 7.5 percent to more than $1.3 billion. After accounting for a one-time credit of $1.8 million, it met Wall Street's expectations. Previously, Hershey had forecast 2011 sales to rise by 3 percent to 5 percent and profit to rise by 6 percent to 8 percent.

The company earlier this year said it was raising prices by nearly 10 percent to offset rising prices. Citigroup analyst David Driscoll called it a "stellar quarter," although he warned that rising costs are a risk that can be seen in the company's declining gross margin.

Company shares rose 17 cents to close Tuesday at $58.49. They hit a nearly 6-year high of $59.45 early in the day.


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