Hershey set for challenging 2010

Hershey set for challenging 2010

After the brouhaha surrounding Kraft Foods' pursuit of Cadbury, and the will-they-won't-they speculation over whether Hershey would table an offer for the Dairy Milk maker, tomorrow (2 February) sees the latest annual results from the US firm.

The publication of Hershey's 2009 numbers has, as the Brits would say, a touch of "after the Lord Mayor's show" about it. In other words, hearing how Hershey has fared in 2009, and how management sees the business in 2010 is something of an anti-climax after the company decided not to bid for Cadbury.

A merger with Cadbury was the last chance for Hershey to break free from its reliance on the US market and become a significant player on the global stage. Hershey has ventures in markets like India and Singapore but remains anchored in the US, with around 80% of the company's sales generated domestically.

At first glance, Hershey seemed to enjoy steady progress in 2009. In July, the Reese's maker upped its revenue and earnings targets as price hikes and advertising boosted sales. In October, Hershey again raised its earnings per share target after an increase in third-quarter income. And analysts at Stifel Nicolaus have forecast a 3% in fourth-quarter earnings per share.

Looking ahead, the Stifel analysts believe Hershey is likely to issue 2010 earnings guidance that will fall within its long-term target of 6-8% growth.

However, looking ahead, there remain clouds on Hershey's horizon. The confectioner spent 2009 increasing prices and there will be questions over how long that can continue in a weak consumer environment - even on recession-resilient items like chocolate.

"Although sales seem to be holding up in this tough economy, we aren't convinced that this will continue to be the case," Morningstar analyst Erin Swanson tells just-food. "Hershey has noted in the past that retail prices for its confectionery offerings could be about 25% higher than a year ago. We expect that the consumer response to these higher price points will set the stage for how the firm approaches the peak selling periods through the Easter season."

In the third quarter of 2009, it was Hershey's moves to increase prices that boosted sales, with president and CEO Dave West citing "price elasticity" as a factor in falling volumes.

And that trend is likely to have continued into the fourth quarter. Stifel analysts Chris Growe, Daniel Stephen and Andrew Carter have predicted sales growth of 1% but, crucially, see Hershey's volumes falling 5%.

After a year of price hikes, and faced with ever-cautious consumers, Hershey will have to watch its pricing very closely in 2010. The company, however, is two months into a year when confectioners will likely be faced with commodity-cost pressure.

"We look to soft volumes entering 2010 as well as the likelihood of significant cost inflation in the year as impediments to EPS growth over and above its long-term targets. With an expected increase in marketing (20% or so), we foresee modest operating profit growth for the year," the Stifel analysts said.

Aside from 2010, the Hershey management is likely to be quizzed on its strategy for medium-term growth and what plans - if any - the company has for international expansion.

Kraft and Cadbury may initially be distracted by combining what will be the world's largest confectionery business but, in the medium term, Hershey is facing a bigger competitor, particularly in emerging markets like India and Mexico.

Now that Cadbury is set for Kraft's ownership, there seem to be few deals that would propel Hershey up the confectionery league table. "Hershey will have to rely on small acquisitions of regional players if it wants to expand internationally, in our view," Swanson says.

And the mixed prospects for Hershey in 2010 and beyond leave the Stifel analysts "comfortable" with its 'sell' rating on the company's shares.

"We are forced to ask ourselves now about Hershey's long-term prospects and cannot get past the notion that we believe the company is in a worse place today than they were before Kraft's announcement of the Cadbury deal."