Halloween is upon us: cue the horror film marathons, cute kiddie costumes, and sugar crashes that leave you looking like a zombie the next day. Right now is prime time for candy-maker extraordinaire, Hershey (NYSE:HSY), but several forces are threatening to turn its Halloween season into a (Milk) Dud.
The Nightmare before Halloween: Hurricane Sandy Claws
They called it "Frankenstorm," and for good reason. Hurricane Sandy was the meteorological manifestation of Frankenstein's monster, a deadly mix of three weather events that assaulted the Eastern Seaboard and Midwest. Arriving just days before Halloween, the storm left a wake of flooding, downed trees, and power outages that now overshadow the usual spooky festivities.
While some neighborhoods are planning to celebrate as planned, many events have been cancelled, due to the storm's devastation. The annual Village Halloween Parade in New York City has been cancelled for the first time in 39 years, as city employees concentrate on recovery efforts, instead.
Analysts had projected the holiday to be a record-breaker, with Americans spending $8 billion on Halloween festivities -- $2.2 billion of that on candy alone, according to the National Confectioners Association.Â With the storm causing a redirection of funds and activities, the sales figures are unlikely to meet the record-breaking estimates. As a result, Hershey and other confectioners may take a hit during their most profitable season of the year.
However, Hershey's U.S. candy, mint, and gum division, in outlet and convenience store channels, was up 5.9% year over year from Q3 2011, which the company attributed partially to early Halloween prep. With this segment producing 90% of the company's U.S. retail business, the company was able to increase its market share by 1% in Q3 2012.
Sweet tooth (decay)
The health-conscious community has been out in full-force, spreading the message to parents preparing for Halloween that candy is B-A-D. From dentists providing games for parents to hand out instead of sweets (in order to prevent "zombie mouth"), to health-care advocates giving tips on rationing your child's candy stockpile, health considerations are motivating parents to choose candy alternatives for their kids.
Though Hershey has gotten on the dark chocolate bandwagon, promoting the health benefits of its flavonoids, there has been little change to the company's core products. Some of Hershey's brands do offer sugar-free options, like Twizzlers and York Peppermint patties, but even then, health professionals warn that sugar-free options are often an invitation to overeating, because most people think that they are better than the original, so they can have more.Â There's little wiggle room for confectioners like Hershey's to promote their products as healthier options.
Good & Plenty
Though Frankenstorm and party poopers may rain on Hershey's Halloween parade, the company still has plenty to celebrate. With the third and fourth quarters being the most profitable for the chocolatier historically, Hershey's still has the Christmas season to look forward to. In fact, confidence in its holiday sales prompted the company to update its earnings projections for the full-year 2012. Though the company narrowed its net sales growth estimate to 8%-9%, it is anticipating an EPS growth rate of 14%-15% (up from 10%-12%), with a $3.22-$3.25 per share range at year end.
Look for Hershey's to increase its advertising in the fourth quarter to promote its holiday offerings, resulting in a sales boost, which will give it the momentum needed to meet its upgraded estimates. The company continues to develop new products (Hershey's Air Delight, anyone?), acquire synergetic businesses, and increase its dividend to shareholders, allowing it to hit the sweet spot for investors, while avoiding any scary side effects from Frankenstorm, and other threats throughout the remainder of 2012.