The Hershey Co. announced sales and earnings for the second quarter ended July 3, 2011. Consolidated net sales were $1,325,171,000 compared with $1,233,242,000 for the second quarter of 2010. Reported net income for the second quarter of 2011 was $130,019,000 or $0.56 per share-diluted, compared with $46,723,000 or $0.20 per share-diluted for the comparable period of 2010.
In the second quarter of 2011, results included pre-tax charges of $9.4 million, or $0.02 per share-diluted, which were more than offset by an adjustment of $11.2 million, or $0.02 per share-diluted, resulting in a net credit of $1.8 million due to a reduction of previous estimates.
For the first six months of 2011, consolidated net sales were $2,889,394,000 compared with $2,641,085,000 for the first six months of 2010. Reported net income for the first six months of 2011 was $290,134,000 or $1.26 per share-diluted, compared with $194,117,000 or $0.84 per share-diluted, for the first six months of 2010.
"I'm pleased with Hershey's second quarter results as solid marketplace momentum continued, resulting in strong overall financial performance," said John P. Bilbrey, president and chief executive officer in a prepared statement. "Our business model and strategy to invest in core brands, disciplined innovation, Insights Driven Performance (IDP) and consumer capabilities remains effective and is sustainable. We'll continue with this disciplined approach and build on these initiatives, in both domestic and international markets, as it will enable the Company to consistently meet its net sales and earnings objectives in the future.
"In the second quarter, Hershey's net sales increased 7.5 percent, somewhat greater than our initial expectations, driven by volume growth, primarily new products, in both U.S. and international markets, resulting in greater levels of in-store merchandising and programming versus our estimates, and earlier than expected shipments to customers due to a change in the timing of their promotional calendars. Net price realization, primarily in the U.S., was a 3 point benefit, while foreign currency exchange rates added about a half point.
"Through the first-half of the year, the U.S. CMG – candy, mint and gum – category and Hershey marketplace performance have outpaced the historical category growth rate of about 3 to 4 percent. Specifically, Hershey U.S. CMG retail takeaway for the 28 weeks ended July 9, 2011, which along with the comparable period in 2010 encompasses each year's entire Easter season results, in channels that account for over 80 percent of our retail business, was up 8.1 percent. In the channels measured by syndicated data, U.S. market share increased 0.9 points. Our marketplace performance reflects a longer Easter season and solid sell through that resulted in a 1.0 point market share gain in this season, successful new products launches, as well as continued momentum in many of our everyday core chocolate and sweets and refreshment businesses. Brand strength was attributable to increased advertising and retail effectiveness. In the second quarter, advertising expense increased about 8 percent versus the year ago period, in line with the mid-single digit percentage increase forecasted for the full year.
"Second quarter adjusted EBIT margin was in line with last year as adjusted selling, marketing and administrative (SM&A) costs – excluding advertising – declined as a percentage of sales versus last year. Adjusted gross margin declined in the second quarter as net price realization and supply chain efficiencies and productivity were more than offset by higher input costs. As we've previously stated, input costs will be higher in 2011, however, there is no change to our full-year inflation outlook. We continue to make good progress against our supply chain initiatives and Project Next Century is on track. We'll deliver meaningful cost savings over the remainder of the year and estimate that full-year adjusted gross margin will be about the same as last year.
"As we enter the third quarter, we are well-positioned to continue to increase U.S. market share and deliver on our financial objectives. In the second half of the year, consumers will begin to see higher retail price points on our everyday instant consumable and take-home packaged candy. Therefore, over the remainder of the year, we expect U.S. CMG category growth to be within the historical 3 to 4 percent growth rate. We'll closely monitor category performance, work with our key retail partners, and make necessary consumer investments to ensure that the category continues to perform well in the second half of the year and into 2012. As stated earlier, in 2011, we expect advertising expense to increase mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the U.S. and international markets. As a result, we expect 2011 net sales, including the impact of foreign currency exchange rates, to be greater than the Company's long-term 3 to 5 percent objective and increase around 6 percent. For the full year, we expect adjusted SM&A - excluding advertising - to increase, but at a rate less than net sales. Combined with our strong first-half performance, solid in-store merchandising and seasonal programming, we now expect 2011 earnings per share-diluted to be greater than the Company's long-term 6 to 8 percent objective and increase around 10 percent for the full year," Bilbrey concluded.
- Sodium Reduction: McDonald’s has already reduced sodium by 10 percent in the majority of its national chicken menu offerings – most recently Chicken McNuggets®, a Happy Meal favorite. Sodium reductions will continue across the menu in accordance with the Company’s 2015 commitments.
- New Happy Meal: McDonald’s will begin rolling out the new Happy Meal in September 2011, with the goal of having them available in all 14,000 restaurants during Q1 2012. The new Happy Meal will automatically include both produce (apple slices, a quarter cup or half serving) and a new smaller size French fries (1.1 ounces) along with the choice of a hamburger, cheeseburger or Chicken McNuggets, and choice of beverage, including new fat-free chocolate milk and 1 percent low fat white milk. For those customers who prefer a side choice of apples only, two bags of apple slices will be available, upon request.
- By adding fruit in every Happy Meal, McDonald’s hopes to address a challenge children face in meeting the recommended daily consumption of produce. McDonald’s has offered apples as a requested choice in Happy Meals since 2004. And, while recent research found that on average, 88 percent of McDonald’s customers are aware of the option, apples are chosen in only 11 percent of Happy Meal purchases.
“Recent research has shown that younger children are consuming more fruits and vegetables, but we still have a long way to go to increase consumption to meet daily recommendations for these important food groups,” said Elizabeth Pivonka, PhD, RD, president and CEO of Produce for Better Health Foundation. “McDonald’s announcement to include apples in every Happy Meal and being one of the first quick service restaurant to do so - further strengthens their seven years of support in our campaign to educate children and their parents on the benefits of fruits and vegetables.”
For many months and in some cases, years, McDonald’s has been engaging suppliers, government and non-government organizations to determine ways it could play a role in helping society address today’s obesity concerns. McDonald’s will develop additional fruit and vegetable choices and expects them to roll out over the next few years. The company will continue to evaluate new scientific research, public health statistics and customer insights and behavior to determine further nutrition adaptations to Happy Meals.
“McDonald’s agrees with leading food and nutrition experts that making incremental lifestyle modifications with food consumption may lead to improvements in an individual’s well-being,” said Cindy Goody, PhD, MBA, RD, McDonald’s senior director of nutrition. “We support parents in their effort to encourage their children to enjoy the foods that are good for them along with the foods they love.”
- Children’s food and beverage advertising initiative: Since 2006, McDonald’s has supported the Council of Better Business Bureaus (“CBBB”) Children’s Food and Beverage Advertising Initiative (“CFBAI”) involving a voluntary Food Pledge to only nationally advertise products to kids that represent healthier dietary choices. McDonald’s was actively engaged in the process to help develop CBBB’s recently announced more rigorous pledge standards, which include stricter sodium and sugar criteria, zero grams artificial trans fat per labeled serving, and requirements for nutrient components to encourage.
- Listening tour: To ensure that the company’s ongoing commitments are supporting parents and communities, Fields and McDonald’s U.S. executive leadership team will embark on a national listening tour in August. They will hear directly from parents and nutrition experts about how McDonald’s can play a role in this important topic. McDonald’s will launch a new online parents’ community that provides a forum for McDonald’s and parents to more frequently engage in dialog around these important topics.
- Accountability and measurement: To evaluate McDonald’s progress and the impacts of its nutrition commitments, McDonald’s will rely on independent third-parties with expertise in children’s well-being. The company is establishing a Kids’ Food and Nutrition Advisory Board comprised of parents and experts in children’s nutrition, education and behavior to help develop effective nutrition and active lifestyle marketing messages and programming for kids. McDonald’s will also enter into an agreement with a third-party organization to collaborate on a comprehensive measurement process that sets benchmarks and annual progress against commitment goals, which will be reported publicly.
