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Hershey suffers flat sales

By Anita Awbi , 21-Apr-2006

Iconic chocolate and snacks brand Hershey has announced disappointing sales figures, but posted a seven per cent rise in quarterly profit as the company works on product innovation and cost minimisation.

The manufacturer of Hershey Kisses and Reese's peanut butter cups said yesterday that first quarter sales for 2006 rose by a minimal 0.6 per cent from last year's $1.12bn (€909m) to $1.13bn.

But net income rose to nearly $121m last quarter, compared to $113m in the same period last year.

 

The firm said this was due to increased "productivity, solid cost control and a lower tax rate", as costs and expenses fell 6.2 per cent to $923,003.

 

"Results for the first quarter were mixed," said CEO Richard Lenny, "as modest sales growth was leveraged through productivity improvement and cost control to deliver solid earnings from operations."

 

But gross margins also fell, worrying some analysts. Reuters reported that analyst firm JP Morgan was concerned by the first quarter's slow sales and falling margins.

 

Pablo Zuanic, analyst with the New York-based equity firm said in a research note: "While we were well aware of the commodity headwinds in [the first quarter], we had expected gross margins to increase year-over-year."

 

Hershey remains positive it can deliver a full-year net sales increase above its three to four per cent long-term goal, through the introduction of "innovative platforms" such as dark chocolate, refreshment, cookies and nut-based snacks.

 

"These platforms deliver highly incremental sales and profitability while enabling Hershey to leverage its iconic brands, marketplace leadership, and in-store presence," Lenny said.

 

The firm also seeks to rationalise existing product lines, hinting that divestures may be in the pipeline.

 

"In addition, we'll be reducing the absolute number of both existing and new products. This will streamline our business system and ensure the appropriate focus on these high growth initiatives," Lenny said.

 

Despite prices for valuable confectionery commodities such as cocoa and sugar reaching record highs, Hershey does not seem to be phased.

 

Lenny insisted the firm was on top of rising input costs, saying that across the business system there is "good visibility into the full-year cost profile".

 

Late last year the company noted that the volatile environment in commodities was likely to increase throughout 2006, with the political situation in the Ivory Coast a major concern in the cocoa market.

 

In a press conference earlier this year, management said its strategic hedging of commodities meant the effects of price fluxations would be minimised.

 

The degree to which sugar and cocoa had been hedged was not revealed to protect strategy. But management said commodity hedging was no more or less than it had been historically and that Hershey had always taken a long-term view on sugar.

 

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