China to blame as Hershey reports Q2 loss of nearly $100m

The US chocolate giant offered a mixed bag of results during its Q2 2015 earnings report, published on August 7, as it exceeded analyst expectations but posted a big net loss.

Hershey reported a net loss for Q2 of $99.9m – down from a net income of $168.2m in Q2 2014.

On the plus side, Hershey reported net sales of $1.578.8m, compared with last year’s $1.578.3m.

John Bilbrey, chairman, president and CEO of the Hershey Company, said these numbers are in line with what the company expected.

However, the 1.3% net sales increase did not include the unfavorable foreign currency translation of 1.3 points, he said.

“​Results were adversely impacted by international performance, primarily in China,” ​he said during an earnings call.

“As previously stated, macroeconomic challenges and changing consumer shopping behavior in China were a headwind. Over the remainder of the year we are optimistic that our core brand and new product initiatives in both North America and international markets will drive growth.”​

International issues​

A decline in chocolate sales in China was certainly a problem for Hershey’s International and Other division, as net chocolate sales in China dropped $35m.

The total international segment dropped 12.1% to $179.3m.

Hershey, which acquired an 80% stake in Shanghai Golden Monkey Food Joint Stock (SGM) in 2014, said poor performance internationally can be attributed to a dilution of SGM in addition to lower Chinese chocolate sales.

The company said it has increased promotional spending across the Chinese market.

Hershey’s international operating loss was $44.5 million, compared with $1.5 million in Q2 2014. Net sales in Mexico, Brazil and India were in line with 2014.

Bearish present, bullish future​

James Chen, a senior market analyst with CityIndex, said the Hershey’s stock dropped more than 3% to less than $89 per share after the earnings call. The previous day, the stock closed at $92.20, showing a sharp drop in investor confidence.

This may not be the end of short-term hard times for the company, Chen told ConfectioneryNews.

Hershey’s stock has fallen 15% year-to-date and may fall further in the near future. However, he said it has been on an upward trend since 2009 and may be able to continue its rise.

“With continuing weakness in China and persistent strengthening of the US dollar, along with Hershey's quarterly revenue miss, the company's stock could have further to fall before finding support,”​ Chen said.

“Currently, key downside support is around the $86.00 level. On a longer-term basis, however, the bias should be towards an overall resumption of the entrenched uptrend, with a key intermediate price target at $100.00.”​

Great expectations​

Even with a poor showing this quarter, Bilbrey expects net sales to be strongly driven by Halloween and other holiday seasonal candy, as well as the roll-out of products such as Kit Kat White Minis and Hershey’s Caramels, for the rest of 2015.

The company is also dipping its toes into the healthy snacking game, launching Brookside Fruit and Nut Bars this year.

Hershey’s expectations for 2015 net sales are an increase of between 1.5% and 2.5%. Company officials also expect a gross margin expansion of between 135 and 145 points. However, this may be offset in part by a higher trade rate and a waning interest in China.

Earnings per share are expected to rise between 3% and 5%, reaching the $4.10 to $4.18 range by the end of the year.