China Is Not Working Out So Well for Hershey

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Confectionery company Hershey Co. (NYSE: HSY) came out with its second-quarter 2015 earnings and it was not pretty. Revenue came in at $1.58 billion, and the company reported a net loss of $0.47 per share on a diluted basis. The average analyst estimates were $1.62 billion in revenue and $0.75 earnings per share. Hershey did report an EPS of $0.78 per share on an adjusted basis. Here is what happened.

Poor macroeconomic conditions in China made an impact on sales in the region. Frightened competitors made moves detrimental to Hershey. This caused Hershey’s Chinese subsidiary, Shanghai Golden Monkey, to perform below expectations. As a result, Hershey evaluated the company and determined that it should incur a goodwill impairment charge for its Chinese business, which put Hershey into the net loss range for the quarter. Hershey may incur further write-downs in the third quarter. Hershey’s market share loss amounted to 0.1 points in China.

By contrast, smaller rival Tootsie Roll Industries Inc. (NYSE: TR), which operates primarily in the United States, Canada and Mexico, performed pretty well in its most recent quarter. Tootsie Roll saw its revenue and net income increase 3% and 23%, respectively, year over year. New products and clever marketing helped drive sales. Also, not being exposed to the macroeconomic headwinds of China served Tootsie Roll and its shareholders well in the most recent quarter.

Not everything is bad for Hershey. North America performed well. The company gained 0.1 points in market share in the United States. The company expects a strong Halloween and holiday season and anticipates that new products such as Brookside Fruit and Nut Bars in North America will drive sales forward. However, Hershey revised its fiscal 2015 revenue estimate downward again to the 1.5% to 2.5% range from the previous 4% to 5% range.

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The analyst consensus target comes in at $95.31 per share for Hershey, representing a 7% potential gain from its current stock price. Tootsie Roll may continue to perform well if it can keep up its pace of new product innovations and taking prudent steps in international expansion.

Note that William Bias owns shares in Hershey.