On the money: Conservative Hershey outlook disappoints the street

Hershey's move to raise its 2010 profit target failed to cheer Wall Street, with the US confectioner's guidance for 2011 hitting its shares.

Shares in the Reese's maker closed down 3.5% yesterday (21 October) after the company forecast a 3-5% increase in sales and a 6-8% rise in diluted adjusted earnings per share for 2011.

Hershey president and CEO Dave West said macroeconomic challenges and weak consumer confidence would "continue to be a headwind" and that advertising spending will increase.

However, West said that better productivity and cost savings would help to "mitigate the impact" of anticipate higher input costs in 2011. 

Barclays Capital analyst Andrew Lazar described the EPS outlook as "prudently conservative" and added that it would be "disappointing to investors that have become accustomed to double digit gains over the past two years".

West and Hershey CFO Bert Alfonso were coy about the potential impact of growing commodity prices on the company. While Alfonso agreed with West's forecast of higher commodity costs, he was more interested in highlighting the US$80-100m cost savings the manufacturer has found.

"We certainly expect that commodities will be ramping up next year in cost. We've got an awful lot of productivity programmes behind us providing offset there, and in terms of gross margin we don't expect to repeat the type of performance that we had this year in a more benign commodity environment."

Speaking about the US$80-100m cost savings, Alfonso said: "While we achieved more of these savings in the second half of 2010 than we initially estimated, primarily in cost of sales, the majority of these savings will still be attained in 2011 and 2012, although starting next year some of these savings will also flow through the SG&A line."

Hershey has tough comparatives for 2011 but West was confident that the US is going to drive growth, with the recently-launched Pieces, Hershey's Drops and Reese's Minis that will ship in December. "We have other innovation in our pipeline for 2011 that we feel very good about, and so that will be an added component on us for next year," he said.

However, Stanford and Bernstein analyst Alexia Howard outlined concerns around the company's lack of premium products as the economy improves. "The company's lack of exposure to premium chocolate products may pose more of a problem once the economy starts picking up," she said.

While shares in the company are down, the analyst view was not completely gloomy. "We continue to expect solid growth in Hershey's North American business and emerging markets, but on the flip side, cocoa prices and a 50-60% increase in advertising may dampen EBIT margin expansion in the fourth quarter and beyond," Howard added.