Will Golden Monkey Improve Hershey Revenues, Profits?
Global chocolate maker The Hershey Company (HSY) is geared to bolster its presence in the growing market of China. As part of this strategy, last week, the chocolate company completed the previously announced acquisition of 80% interest in Shanghai-based chocolate maker, Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”) for approximately $394 million.
Hershey’s wholly owned subsidiary, Hershey Netherlands B.V., completed the deal and plans to acquire the remaining 20% equity stake next year after receiving the necessary government and regulatory approvals. The total purchase consideration upon acquisition of the 20% stake is estimated to be worth approximately $577 million including debt.
The deal will add popular Chinese brand Golden Monkey honey-peach hard candies, strawberry-flavored cheese chews and seaweed-flavored wafer sticks to Hershey’s already rich portfolio. With the SGM acquisition, China is expected to become Hershey’s second-largest market by 2015-end.
Though the buyout definitely looks like a strategic fit, we are not sure if it can turn around Hershey’s sales and profits in 2015.
Hershey’s first-half 2014 top-line performance was below expectations due to abnormal shopping patterns, increased competition in the confectionery category, continued challenging macro environment and softer international growth.
Increasing competition from competing snacking categories, less consumer shopping trips and consumer weakness hurt U.S. sales. For Hershey, competition has intensified over the past few years.
Moreover, the dramatic increase in dairy costs this year severely hurt Hershey’s gross margins in the first half of the year. Management lacks visibility on further dairy cost rise in 2014, forcing it to lower gross margin expectations twice this year. In fact, management now expects2014 earnings and sales growth rates at the lower end of its long-term targets due to greater-than-anticipated commodity cost headwinds.
In addition, gross margins are expected to decline slightly from the year-ago levels due to higher-than-expected commodity costs, higher trade spending related to greater merchandising activities and an unfavorable mix. Previously, Hershey expected gross margins to increase around 20 basis points.
However, the 2014 financial outlook excludes benefits from the Shanghai Golden Monkey acquisition. Though not expected to benefit Hershey’s adjusted earnings this year, the buyout is expected to be accretive to its earnings in 2015.
Other Stocks to Consider
Hershey carries a Zacks Rank #3 (Hold).Better-ranked food stocks include ConAgra Foods, Inc. (CAG), J&J Snack Foods Corp. (JJSF) and The Hain Celestial Group, Inc. (HAIN). All the three stocks carry a Zacks Rank #2 (Buy).
Read the Full Research Report on HSY
Read the Full Research Report on HAIN
Read the Full Research Report on CAG
Read the Full Research Report on JJSF
Zacks Investment Research
