During The June Call, Management Stated That Chocolate Category Growth Was Below Expectations In China In April And May.
Factors at Play Hersheys sales trends have been weak since 2014 due to lower retail store traffic, stiff competition from the broader snacking category and soft international growth. In June, the company slashed the full-year 2015 sales and profit outlook for the second time in three months and announced 300 job cuts due to weaker growth in China. Lower-than-expected confectionery category growth within the China modern and traditional trades and slower-than-expected consumption trends amid deteriorating economic growth are hurting sales in the country. During the June call, management stated that chocolate category growth was below expectations in China in April and May. We believe that shift in consumer preference toward healthier snacks, like nuts, and increased competition from the broader snacking category are lowering the demand for chocolate. Weak consumer shopping trends due to economic slowdown, increased competitive activity in the chocolate category and strong competition from e-Commerce/online sales are the other factors hurting sales trends. Lesser-than-expected contribution from Shanghai Golden Monkey due to confectionary category weakness also compelled the latest guidance cut. Hershey acquired 80% stake in the Chinese chocolate maker in September last year. The company plans to reassess the value of Golden Monkey. Hershey is slated to acquire the remaining 20% stake in Golden Monkey this September. The gross margins guidance was also slightly lowered, as pricing gains and a relatively better performance in North America are expected to partially offset the weak sales trends in China. Due to these headwinds, we expect the company to report weak top-line results in the second quarter. Earnings Whispers Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below. Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 74 cents per share. Zacks Rank: Hershey carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum. Stocks to Consider Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are: Dean Foods Company DF, with an Earnings ESP of +3.85% and a Zacks Rank #2. Campbell Soup Company CPB, with an Earnings ESP of +2.38% and a Zacks Rank #2. Kellogg Company K, with an Earnings ESP of +4.40% and a Zacks Rank #3.
For the original version including any supplementary images or video, visit http://finance.yahoo.com/news/hershey-hsy-likely-disappoint-earnings-151503525.html