The Hershey Company today announced sales and earnings for the third quarter ended September 29, 2013.
Consolidated net sales were $1,853,886,000 compared with $1,746,709,000 for the third quarter of 2012. Reported net income for the third quarter of 2013 was $232,985,000 or $1.03 per share-diluted, compared with $176,716,000 or $0.77 per share-diluted for the comparable period of 2012.
"Organic sales growth of 6.6 percent this quarter, as has been the case all year, was driven by volume, resulting in solid gross margin expansion and earnings per share-diluted growth," said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. "Our performance continues to reflect the strategy we outlined over the last year that focuses on investments in our core brands, innovation pipeline and international markets that provide us with the greatest opportunities for growth. Over the remainder of the year, we have many exciting products, promotions, programs and merchandising in place across all channels, and our major customers have indicated their expectations for a solid confectionery holiday season. The fourth quarter will also benefit from the shipments of some select 2014 new products to retailers that will occur in December. Therefore, we expect solid fourth quarter net sales growth that will result in a full-year 2013 net sales increase of about 7 percent, including the impact of foreign currency exchange rates."
As described in the Note below, for the third quarter of 2013, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included pre-tax charges of $5.9 million or $0.01 per share-diluted. These charges included $3.0 million or $0.01 per share-diluted related to the Project Next Century program, non-service-related pension expense (NSRPE) of $2.8 million and acquisition and integration costs of $0.1 million. Reported gross margin of 46.1 percent increased 360 basis points versus last year, while reported income before interest and income taxes (EBIT) increased 22.8 percent, generating EBIT margin of 20.0 percent, an increase of 270 basis points versus 2012. For the third quarter of 2012, results included Project Next Century pre-tax charges of $25.8 million or $0.07 per share-diluted, acquisition and integration costs of $4.8 million or $0.02 per share-diluted as well as NSRPE of $4.3 million or $0.01 per share-diluted.
Adjusted net income, which excludes these net charges, was $236,618,000 or $1.04 per share-diluted in the third quarter of 2013, compared with $199,451,000 or $0.87 per share-diluted in the third quarter of 2012, an increase of 19.5 percent in adjusted earnings per share-diluted.
For the first nine months of 2013, consolidated net sales were $5,189,826,000 compared with $4,893,217,000 for the first nine months of 2012. Reported net income for the first nine months of 2013 was $634,395,000 or $2.79 per share-diluted compared with $511,052,000 or $2.23 per share-diluted, for the first nine months of 2012. As described in the Note, for the first nine months of 2013 and 2012, these results, prepared in accordance with GAAP, included net pre-tax charges of $23.1 million and $93.4 million or $0.07 and $0.27 per share-diluted, respectively. Charges associated with the Project Next Century program for the first nine months in 2013 and 2012 were $13.6 million and $68.4 million or $0.04 and $0.19 per share-diluted, respectively. NSRPE for the first nine months in 2013 and 2012 were $8.4 million and $13.0 million or $0.03 and $0.04 per share-diluted, respectively. Additionally, for the first nine months in 2013, acquisition and integration costs were $1.0 million and in 2012, $12.0 million or $0.04 per share-diluted, respectively.
As described in the Note, adjusted net income for the first nine months of 2013, which excludes these charges, was $648,693,000 or $2.86 per share-diluted, compared with $570,854,000 or $2.50 per share-diluted in 2012, an increase of 14.4 percent in adjusted earnings per share-diluted.
For the full year 2013, the Company expects reported earnings per share-diluted of $3.60 to $3.65. This projection, prepared in accordance with GAAP, assumes business realignment charges and NSRPE costs of $0.06 to $0.08 per share-diluted. Charges associated with the Project Next Century program are expected to be $0.03 to $0.05 per share-diluted, while NSRPE is expected to be $0.03 per share-diluted. Despite the impact of these charges in 2013, reported gross margin is expected to increase 310 to 320 basis points.
Third Quarter Performance
Hershey's third-quarter net sales increased 6.1 percent. Volume was a 6.1 point benefit in the quarter driven by core brand growth and new products in U.S. and key international markets. Net price realization was a 0.5 point benefit and foreign currency exchange rates a 0.5 point headwind.
Hershey's U.S. candy, mint and gum (CMG) retail takeaway for the 12 weeks ended October 5, 2013, in the expanded All Outlet Combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of our U.S. retail business, was up 5.0 percent, resulting in a market share gain of 0.7 points. Overall, Hershey's marketplace results were balanced with market share gains in the major channels of the xAOC+C-store universe.
Third-quarter adjusted gross margin increased 300 basis points driven by lower commodity costs, supply chain productivity and cost savings initiatives, favorable sales mix and fixed cost absorption from volume gains.
Selling, marketing and administrative (SM&A) expenses, excluding advertising, increased about 12 percent in the third quarter, less than our estimate of about a 20 percent increase due to timing and, therefore, we expect another meaningful increase in the fourth quarter. Advertising expense for the third quarter and the first nine months of 2013 increased 22 percent versus the year ago periods, supporting core brands and new product launches in both the U.S. and international markets. As a result, the annual increase in advertising expense is now expected to be 22 to 23 percent, greater than the previous estimate of about a 20 percent increase versus last year. Adjusted third quarter EBIT increased 11.8 percent generating adjusted EBIT margin of 20.3 percent, a 100 basis point increase versus last year. Additionally, the tax rate in the third quarter of 33.3 percent was less than the year ago period due to certain discrete tax items. The full-year tax rate is now expected to be about 34.5 percent, slightly lower than earlier estimates.
Outlook
Over the remainder of the year the Company has solid merchandising and programming in place to drive net sales growth of core brands and new products in both U.S. and international markets. The Company continues to estimate that net sales will increase about 7 percent in 2013, including the impact of foreign currency exchange rates.
Given year-to-date results, fixed cost volume absorption and overall input cost deflation, the Company now expects 2013 full-year adjusted gross margin expansion of 240 to 250 basis points versus a previous estimate of 220 to 230 basis points. This increase, as well as the slightly lower tax rate, will offset the aforementioned increase in advertising expense and SM&A investments. As a result, the Company continues to anticipate 2013 adjusted earnings per share-diluted growth of around 14 percent.
"I'm very pleased with our quarterly and year-to-date results. Volume continues to be a driver of our net sales growth despite macroeconomic challenges in the broader marketplace," added Bilbrey. "We've carried our momentum into the fourth quarter which is off to a good start. We have good visibility into seasonal and everyday customer orders over the remainder of the year, which we'll support with merchandising and programming to drive sell through. As a result, we're on track to deliver another record year of solid net sales growth and a double-digit percentage increase in earnings per share-diluted."
"As we look to 2014 and beyond, we will continue to focus on U.S. core brands and leverage Hershey's scale at retail. Our international business continues to progress and we're optimistic about the potential to accelerate our international presence behind our disciplined approach to organic investments and acquisitions or joint ventures. We believe the investments we've made, and will continue to make, have resulted in an advantaged business model enabling us to deliver predictable and sustainable results. As a result, this gives us the confidence to increase our long-term target for annual earnings per share-diluted growth to 9 to 11 percent.
"In 2014, we'll maintain our focus on core brands and continue to drive growth with quality merchandising, programming and advertising. Additionally, we have a solid pipeline of new products, including, York Minis, Hershey's spreads and Lancaster Soft Crèmes caramels, and expect innovation to contribute meaningfully to our net sales growth in 2014. Our international business is on track, and we expect solid double-digit net sales growth, on a percentage basis versus the prior year. Therefore, we expect 2014 net sales growth to be within our 5 to 7 percent long-term target, including the impact of foreign currency exchange rates. As has been the case for many years, Hershey is a gross margin focused company. We have solid productivity and cost savings initiatives in place and, while early in the planning cycle, we expect adjusted gross margin expansion next year that will drive 2014 growth in adjusted earnings per share-diluted in the 9 to 11 percent range, in line with our revised long-term target," Bilbrey concluded.