Hershey Provides 2017 Outlook

Company also announces fourth-quarter and full-year 2016 results

The Hershey Company announced sales and earnings for the fourth quarter ended December 31, 2016. Consolidated net sales were $1,970.2 million compared with $1,909.2 million for the fourth quarter of 2015. Reported net income for the fourth quarter of 2016 was $116.9 million or $0.55 per share-diluted, compared with $227.9 million or $1.04 per share-diluted for the comparable period of 2015.

“In 2017, our North America business is focused on the continued rollout of Hershey’s Cookie Layer Crunch bars, barkTHINS chocolate distribution gains and other exciting new products such as Reese’s Crunchers candy and Krave meat bars and sticks,” said Michele Buck, Executive Vice President and Chief Operating Officer, The Hershey Company. “We anticipate these investments and related consumer marketing plans will accelerate our North America sales growth versus 2016 performance, which should enable us to outpace the broader food group in this challenging operating environment. International macroeconomic challenges persist, especially in China, and we expect a slow start to the year in that segment. Therefore, the company estimates full-year 2017 net sales growth of 2% to 3%, including a net benefit from acquisitions of about 0.5 points and unfavorable foreign currency exchange rates of about 0.25 points.

“The review of our cost structure, as well as the marketing mix of investments that will drive growth, is progressing,” Buck continued. “As mentioned earlier, fourth quarter implementation of certain efficiency initiatives related to this review enabled us to exceed our profitability targets and generate full-year adjusted operating profit margin of 20.4%, a 40 basis point increase versus last year. We will discuss these initiatives and the related ‘Margin for Growth’ program in detail on March 1, 2017. We anticipate this will be a multiyear program designed to improve overall operating profit margin through supply chain optimization, a streamlined operating model and reduced administrative expenses, with savings primarily achieved in 2018 and 2019. For 2017, savings from these efficiency initiatives and the related ‘Margin for Growth’ program, which are included in our 2017 outlook, are modest due to the work that started in the fourth quarter of 2016. We have other productivity and cost savings initiatives in place and do not expect input cost inflation; therefore, the company expects adjusted gross margin to increase slightly in 2017. Our brands continue to respond positively to marketplace investments and we plan to continue with this approach. Specifically, we’re making additional investments this year in advertising and marketing, technology and IT capabilities and analytic approaches that we believe will be an enabler of predictable and profitable growth.”

In 2017, the company anticipates its effective tax rate to be between 28.5% and 29.0%. This reflects a forecasted 0.75 point benefit from adopting Accounting Standards Update (ASU) 2016-09 for the accounting of employee share-based payments, which was recently issued by the Financial Accounting Standards Board. As a result, the company anticipates 2017 adjusted earnings per share-diluted to increase 7% to 9% and be in the $4.72 to $4.81 range, including the aforementioned benefit from the adoption of ASU 2016-09 of about $0.05 per share-diluted.

Fourth-Quarter Performance

Consolidated net sales were $1,970.2 million in the fourth quarter of 2016, an increase of 3.2% versus the fourth quarter of 2015. Excluding the effect of foreign currency translation, a 0.5 point headwind, net sales increased 3.7% versus the year ago period. Volume was a 3.4 point contribution and in line with estimates. Net price realization was off 0.6 points, as anticipated, due to slightly higher levels of direct trade supporting increased in-store merchandising and display activity. The barkTHINS brand acquisition was a 0.9 point benefit in the fourth quarter of 2016.

Adjusted gross margin was 44.5% in the fourth quarter of 2016, compared to 45.0% in the fourth quarter of 2015. The 50 basis point decline was primarily driven by unfavorable supply chain costs and trade, partially offset by supply chain productivity and costs savings initiatives.

As expected, total advertising and related consumer marketing expense increased versus the fourth quarter of 2015. Selling, marketing and administrative (SM&A) expenses, excluding advertising and related consumer marketing and the barkTHINS brand acquisition, increased about 4.5% in the quarter. Higher employee-related costs and increased depreciation and amortization more than offset the aforementioned savings from the efficiency initiatives. As a result, consolidated adjusted operating profit of $378.4 million in the fourth quarter of 2016 declined 0.5% versus the fourth quarter of 2015.

The full year tax rate was about 90 basis points lower than our previous estimate due to the mix of fourth quarter international operating results and increased favorable tax credits and other incentives including research and development. For the full year ended December 31, 2016, the company repurchased $420 million of outstanding shares, resulting in diluted shares outstanding of 215.3 million at the end of 2016, compared to 220.7 million at the end of 2015.