When sweets-maker Hershey reported third quarter earnings on Wednesday, it left a bitter aftertaste: for the fifth quarter in a row, it cut its forecast. As JPMorgan analyst Kenneth Goldman put it during the call: “It feels like every quarter, something unexpected starts to bite.”
Sales were down slightly, though year-to-date sales were still up 1.2%, a sign the trend is getting more “challenging.” Versions of that word cropped up eight times during the call.
“Headwinds” cropped up four times, “tough” or “tougher” three times. “Macroeconomic” was dragged out eight times, usually in conjunction with “environment” – as in “given the macroeconomic environment” – but also with “challenges” and “winds,” as in CEO John Bilbrey’s elegant, “It’s been unusual in 2015, been some macroeconomic winds.”
CFO Patricia Little was able to put them into one sentence (earnings call transcript via Seeking Alpha): “Lower consumer trips and the macroeconomic environment continue to be a challenge within the retail environment….”
Upon these kinds of encouraging words, shares plunged 6.5% for the day and are off 20% from their high in January.
Citigroup analyst David Cristopher Driscoll vocally doubted Hershey’s earnings-per-share projections with some frustration:
“It’s like a tsunami of negatives. You guys say US sales are weaker. China chocolate sales are weaker. Shanghai Golden Monkey negative $0.35 versus $0.15, worse than before. Tax rate is worse. These are large numbers….”
Hershey blamed the usual suspects: China, Brazil, the dollar. But it could hardly blame them for the disappointing results in the US.
So it blamed the American consumer, or rather the “bifurcation” between the small number of well-off consumers who can buy whatever “premium” chocolates they desire, and the many who can’t afford chocolates and have to make do with cheap sugary sweets (the “value segment”).
Alas, Hershey is “under-represented” at the premium end, which is less than 10% of total category consumption, Bilbrey said. “And in the low end” – for the 90%-plus of the folks who can’t afford chocolates – “we need to work on the sweet side.”
American consumers got blamed for another problem: they weren’t going to the store as often. “Consumer trips,” as Hershey calls them, were down 4% in Q3, though year-to-date they were down only 2%, another trend that is deteriorating. Grocery stores saw a drop-off in the “low single digits.” Drug and convenience stores took the biggest hit, down 9%!
So trips are down just when fuel prices have plunged? In normal times, you’d expect the opposite as people would drive to the store more often. But not in this retail environment.
“It’s that kind of choppiness that we historically haven’t seen,” VP of Investor Relations Mark Pogharian told the analysts. But it’s the company’s “everyday business” that gets hit hard by these declining “trips,” as each trip to a store gives consumers a chance to make an impulse purchase of sweets lined up enticingly by the cash register.
And that has been “a drag on the business overall here over the last 12 to 18 months,” Bilbrey said. “2015 hasn’t unfolded the way that we’d planned.” But the company would “remain focused.” Then came the big however, the new American reality of “income bifurcation,” as he called it:
While overall consumer confidence is trending up, lower income consumers continue to be fragile as income and wage growth has been minimal.
Higher income and more confident consumers are driving premium growth [the chocolates], while cost-conscious consumers are driving the value segment [the candy].
In this economic environment where “consumer bifurcation has been an important driver,” as Bilbrey said, “there are some macro issues that are impacting retailers as well as our business. And so we’ve got to operate within that environment.”
He also admitted that price increases – inflation – accounted for about half the revenue growth of the segment, historically, and that volume accounted for the other half. The price increases are still coming through, but the volume, hit by the infamously declining “trips,” is falling off.
Hershey has put its corporate finger on an increasingly bedeviled American economic reality where businesses are confronted with this “bifurcation”: Selling to those few who benefited from the Fed’s monetary policies and the asset bubbles these policies have engendered; and trying to sell to the middle class whose stagnant incomes are being eaten up by the soaring costs of housing (result of Housing Bubble 2), healthcare, college, cars, and a million other things.
These people have gone into debt to keep their head above water and thus have become the over-indebted modern-day proletariat that lives from paycheck to paycheck, without savings or emergency funds, struggling to make ends meet, and they simply have trouble spending money they don’t have. And businesses are now catching the drift: it’s going to be tough out there in this Fed-engineered economy.
The impact is already cascading through the economy. Read… And Now Trucking Is Suddenly Slowing Down
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