The Hershey Co. announced sales and earnings for the third quarter ended Oct. 2, 2011. Consolidated net sales were $1,624,249,000 compared with $1,547,115,000 for the third quarter of 2010. Reported net income for the third quarter of 2011 was $196,695,000 or $0.86 per share-diluted, compared with $180,169,000 or $0.78 per share-diluted for the comparable period of 2010.
For the third quarter of 2011, these results, prepared in accordance with generally accepted accounting principles (GAAP), include net pre-tax charges of $13.5 million or $0.03 per share-diluted. These charges were related to the Project Next Century program announced in June 2010. Additionally, the company recorded a pre-tax gain of $17.0 million, or $0.05 per share-diluted, on the sale of a non-core trademark license. Despite these charges and gain on sale, reported income before interest and income taxes (EBIT) increased 7.2 percent resulting in reported EBIT margin of 19.8 percent.
For the third quarter of 2010, GAAP results included net pre-tax charges of $4.5 million, or $0.01 per share-diluted, which were related to the Project Next Century program.
Adjusted net income, which excludes these net charges and the gain on sale, was $193,820,000 or $0.84 per share-diluted in the third quarter of 2011, compared with $182,918,000 or $0.79 per share-diluted in the third quarter of 2010, an increase of 6.3 percent in adjusted earnings per share-diluted.
For the first nine months of 2011, consolidated net sales were $4,513,643,000 compared with $4,188,200,000 for the first nine months of 2010. Reported net income for the first nine months of 2011 was $486,829,000 or $2.12 per share-diluted, compared with $374,286,000 or $1.63 per share-diluted, for the first nine months of 2010.
For the first nine months of 2011, these results, prepared in accordance with GAAP, include net pre-tax charges related to Project Next Century of $21.4 million or $0.06 per share-diluted, as well as the previously mentioned pre-tax gain on sale of non-core trademark licensing rights of $17.0 million, or $0.05 per share-diluted.
For the first nine months of 2010, these results, prepared in accordance with GAAP, include net pre-tax charges, of $90.7 million or $0.31 per share-diluted related to Project Next Century and a non-cash goodwill impairment charge.
Adjusted net income for the first nine months of 2011, which excludes these net charges and the gain on sale, was $489,092,000, or $2.13 per share-diluted, compared with $447,359,000 or $1.94 per share-diluted in 2010, an increase of 9.8 percent in adjusted earnings per share-diluted.
In 2011, reported gross margin, reported EBIT margin and reported earnings per share-diluted will be impacted by charges associated with Project Next Century. Therefore, the company expects reported earnings per share-diluted to increase around 25 percent, including business realignment and impairment charges of $0.11 to $0.12 per share-diluted and the previously mentioned gain on sale of $0.05, and be in the $2.72 to $2.76 range. The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program remains at $140 million to $160 million.
"Hershey's third quarter financial and U.S. marketplace results were solid as our core brands continue to perform well in all retail channels," said John P. Bilbrey, president and chief executive officer in a prepared statement. "Results were slightly better than our expectations as both U.S. chocolate and non-chocolate candy categories continue to grow greater than the historical average despite macroeconomic challenges. We continue to leverage our intellectual insights and proprietary tools to drive overall category growth that benefits both Hershey and our retail partners.
"In the third quarter, Hershey's net sales increased 5.0 percent. Net price realization, primarily in the U.S., was a 5.4 point benefit. Seasonal volume gains, driven by Halloween, were better than our initial expectations. New products, primarily Reese's Minis and Hershey's Drops, continue to perform well in the marketplace. Offsetting these gains were volume declines, in line with our modeling, due to price elasticity, resulting in an overall volume decline in the third quarter of about 1 point. Foreign currency exchange rates added about 0.6 points.
"For both the quarterly and year-to-date periods, U.S. CMG - candy, mint and gum - category and Hershey marketplace performance continued to outpace the historical category growth rate of about 3 to 4 percent. Specifically, Hershey U.S. CMG retail takeaway for the 12-weeks ended Oct. 8, 2011 and year-to-date periods, in channels that account for over 80 percent of our retail business, was up 8.7 percent and 8.3 percent, respectively. In the channels measured by syndicated data, U.S. market share in the third quarter and year-to-date periods each increased 1.0 point. These results were driven by the investments we have made in our core brands, including in-store programming, merchandising and advertising. The Halloween season is off to a good start, with solid programming and merchandising in the marketplace. We continue to invest in our brands and anticipate a solid finish to the year.
"As expected, the basis point change in adjusted gross margin sequentially improved from last quarter. We continue to make good progress against our supply chain productivity efforts, and savings from the Project Next Century program are on schedule. These initiatives and the net price realization were more than offset by higher input and supply chain costs. We're on track to deliver our full-year cost savings and productivity goals and continue to expect full-year adjusted gross margin to be about the same as last year.
"Our performance has provided flexibility in the timing of incremental investments in the second half of the year. Specifically, in the third quarter, versus our initial expectations, we increased spending on select brand-building initiatives and go-to-market strategies, including advertising, up about 7 percent versus last year. Despite these additional investments, adjusted EBIT increased 4.4 percent in the third quarter resulting in adjusted EBIT margin of 19.6 percent, down slightly versus last year.
"Strong earnings growth drove solid operating cash flow generation. Therefore, despite the working capital needs of the seasonally intensive third quarter, we paid down $250 million of long-term notes that were due in September and repurchased $165 million of our common shares to replenish shares issued in connection with exercises of stock options. We continue to monitor the credit markets and would anticipate issuing notes in the near future given the current record-low interest-rate environment. Our continued disciplined approach to balance sheet and working capital management will enable us to remain flexible in our pursuit of building stockholder value.
"Our consumer-driven strategy and investment in global brands are delivering the desired results. As we did in the third quarter, over the remainder of the year we'll make incremental investments in our brands and business while delivering solid financial results. A portion of the incremental investment is in advertising which we now expect to increase high-single digits, on a percentage basis, in 2011 versus the prior year. This is greater than our previous estimate of a mid-single-digit percentage increase. Full-year adjusted SM&A, excluding advertising, is also expected to increase greater than our previous estimates.
"We're positioned to carry our marketplace momentum into the fourth quarter and gain market share for the third consecutive year. Additionally, Halloween got off to a solid start and we now anticipate higher seasonal sales for the full year. Therefore, we expect 2011 net sales, including the impact of foreign currency exchange rates, to increase around 7 percent. This is greater than our previous estimate of about a 6 percent increase. Combined with our strong year-to-date performance, we expect 2011 adjusted earnings per share-diluted to increase around 10 percent for the full year.
"As we look to 2012, we expect the economic environment to remain challenging; however, we are well positioned to succeed in the marketplace. We'll look to leverage our scale at retail in the U.S. and will work closely with our retail partners to ensure conversion is within our price elasticity modeling. We'll also continue our disciplined build out and investment in go-to-market capabilities within key international markets. While we anticipate higher input costs in 2012, we're very focused on adjusted gross margin. The previously announced pricing action and productivity and cost savings initiatives are in place to help mitigate the impact of increased commodity costs. While the spot prices of most key commodities have declined from their 2011 peaks, many are still trading at levels greater than the two-year average price. Therefore, we expect 2012 net sales, including the impact of foreign currency exchange rates, and adjusted earnings per share-diluted growth to be within the company's long-term 3 to 5 percent and 6 to 8 percent objectives, respectively," Bilbrey concluded.
