After a strong 2012- with sales up nearly 10%- quintessential U.S. chocolate-maker The Hershey Company (HSY) is under pressure to maintain its growth from recent years. A big part of its 2012 top-line growth came from a nearly 10% price increase that was phased in over the last couple of years. With input costs moderating, however, Hershey has less of a reason to raise prices, and will have to lean on selling more products. Look for an increase in international sales to fuel future sales growth.
China has been a growth engine for numerous U.S. companies such as Nike (NKE), Coach (COH) and YUM Brands (YUM) to name a few. Hershey is another company that has been making solid gains from international growth. In China, Brazil, and Mexico, the company said it made solid progress in 2012. In 2013, based on current exchange rates, Hershey estimates net sales outside the U.S. and Canada will increase to 15% to 20%, keeping the company on a path to reach $1 billion in net sales by the end of 2014.
Hershey announced plans for a 20% increase in advertising in 2013, a significant bump up for a large, mature food company. Most of the increase will go toward backing the expansion of Brookside products, which include products like chocolate-covered pomegranate and acai berries, into food, drug and mass retailers in the U.S.
In January 2012, Hershey acquired all of the outstanding stock of Brookside Foods Ltd., a privately-held confectionery company based in British Columbia, Canada, at a purchase price of C$175 million. Hershey believes the business complements its position in North America, and it expects to make investments in manufacturing capabilities and conduct market research that will enable future growth.
The increase in ad spending will also go toward broader advertising for Hershey products in China, where sales increased 50% last quarter, and to back the launch of new products, like bite-sized versions of Kit Kat, Twizzlers and Jolly Ranchers.
The Board of Directors announced quarterly dividends of $0.42 on the Common Stock and $0.38 on the Class B Common Stock. The dividends are payable March 15, 2013, to stockholders of record February 25, 2013.
It is the 333rd consecutive regular dividend on the Common Stock and the 114th consecutive regular dividend on the Class B Common Stock. Hershey has a current dividend yield of 2.06% with a 5-year average annual dividend growth rate of 7%.
Despite the spending increase, Hershey is raising its per-share earnings growth outlook for 2013 to 10% to 12%, saying that cost savings and commodity deflation give the candy-maker the flexibility to make the increased investments.
For the 4th quarter 2012, Hershey reported a profit of $149.9 million, or $0.66 a share, up from a year-earlier profit of $142.1 million, or $0.62 cents a share.
First Call analysts' consensus projects 2013 EPS of $3.64, an increase of 12% from 2012 EPS. The EPS growth will continue in the coming years with a 9.7% EPS increase in 2014 and 7.7% EPS growth in 2015. First Call has a buy recommendation with a 2.4 rating.
Based on 2013 EPS, Hershey has a 12-month price target of $90.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.