The Hershey Company (NYSE: HSY) today announced sales and earnings for the third quarter ended September 30, 2018 and reaffirmed its 2018 reported net sales and adjusted earnings outlook.
"We remain on track to achieve the financial targets we shared earlier this year, and I am pleased with the progress we are making against our key strategic focus areas," said Michele Buck, The Hershey Company President and Chief Executive Officer. "Our U.S. core confection retail takeaway and share trends are sequentially improving, in line with our expectations, driven by strong Halloween results and distribution gains on core items. The addition of Pirate Brands strengthens our brand portfolio and marks our second high-growth, high-margin acquisition this year to capture incremental snacking occasions. Our International business continues to deliver profitability improvements while driving strong constant currency organic sales growth. Importantly, we are achieving these results while staying true to our values and purpose, as evidenced by being named to the Dow Jones Sustainability World Index for the 6th consecutive year."
Third Quarter 2018 Financial Results Summary 1
- Consolidated net sales of $2,079.6 million, an increase of 2.3%.
- Constant currency net sales growth of 3.0%, with a 0.7 point headwind from foreign currency exchange.
- The net impact of acquisitions and divestitures was a 2.5 point benefit to net sales growth.
- Reported net income of $263.7 million, or $1.25 per share-diluted.
- Adjusted earnings per share-diluted of $1.55, an increase of 20.2%.
1 All comparisons for the third quarter of 2018 are with respect to the third quarter ended October 1, 2017
2018 Full Year Financial Outlook Summary 2
- As previously indicated, full-year reported net sales are expected to increase towards the low end of the 3.5% to 5.5% range.
- Organic net sales growth reaffirmed towards the low end of the slightly up to 2% range.
- The net impact of acquisitions and divestitures is estimated to be approximately a 3.5 point benefit.
- The impact of foreign currency exchange rates is expected to be negligible.
- Full-year reported earnings per share-diluted are now expected to be in the $4.82 to $4.97 range.
- The outlook for full-year adjusted earnings per share-diluted is reaffirmed in the $5.33 to $5.43 range, an increase of 14% to 16%.
Third Quarter 2018 Results
Consolidated net sales were $2,079.6 million in the third quarter of 2018 versus $2,033.1 million in the year ago period, an increase of 2.3%. The net impact of acquisitions and divestitures was a 2.5 point benefit, volume was a 1.7 point benefit and net price realization was a 1.2 point headwind. Foreign currency translation was a 0.7 point headwind.
As outlined in the table below, the company's third quarter 2018 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of $68.0 million, or $0.30 per share-diluted. For the third quarter of 2017, items impacting comparability totaled $2.8 million, or $0.01 per share-diluted.
Reported gross margin of 41.5% represented a decline of 490 basis points versus the third quarter of 2017. Adjusted gross margin was 44.0% in the third quarter of 2018, compared to 45.3% in the third quarter of 2017, a decline of 130 basis points. This was in line with expectations, driven by higher freight and logistics costs, as well as incremental investments in trade and packaging.
Advertising and related consumer marketing expense declined 16.5% in the third quarter of 2018 versus the same period last year. This decrease was driven by reductions in agency and production fees, media efficiency gains including an increased focus on earned, or non-paid media, and optimization of emerging brand spend. Media spend on core confection brands in North America in the third quarter was in line with prior year. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 1.5% for the third quarter of 2018. A continued reduction in general administrative costs was more than offset by incremental Amplify selling, marketing and administrative expenses and investment in the multi-year implementation of the company's enterprise resource planning (ERP) system.
2 All comparisons for projected full-year 2018 are with respect to the reported fiscal year ended December 31, 2017
Third quarter 2018 reported operating profit was $406.3 million, resulting in an operating margin of 19.5%. Adjusted operating profit of $470.7 million increased 5.1% versus the third quarter of 2017. This resulted in an adjusted operating margin of 22.6%, an increase of 60 basis points versus the third quarter of 2017, driven by lower selling, marketing and administrative expenses.
The effective tax rate in the third quarter of 2018 was 25.6%, a decline of 600 basis points versus the third quarter of 2017. The adjusted tax rate in the third quarter of 2018 was 22.8%, a decline of 750 basis points versus the third quarter of 2017. The decline in both the effective and adjusted tax rates was driven primarily by U.S. tax reform.