Hershey Co. says snacks and candy are a rare bright spot in the U.S. food industry, but pressure on the company's profit margin disappointed investors.
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Hershey's sales rose 1.5% to $2 billion in the latest quarter, as snack foods are outpacing sales of packaged and canned meals in the U.S., said Hershey Chief Executive Michele Buck, who took the helm in March.
"The broader snacks category continues to grow, despite the volatile consumer and retail environment," Ms. Buck said on a conference call with investors.
However, Hershey's gross profit margin slipped 3 percentage points to 45.3% in the quarter.
The company said that was caused by investments meant to satisfy retailers, a shift to selling a broader range of snacks, as opposed to just candy, and higher supply-chain costs. It expects these factors to dampen its profitability through the first half of 2018.
Hershey's shares fell 3% in Thursday trading.
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Hershey executives have pointed to the challenges the company and industry face with a rise in health-focused snacks, especially at checkout lanes. The maker of chocolate Kisses and Reese's peanut butter cups will continue to focus on branching out beyond candy, Ms. Buck said.
Chief Financial Officer Patricia Little said that "nothing is as profitable...as our core products," such as chocolate and other candy, "but we do need to expand our portfolio."
In recent years, Hershey bought a beef jerky brand and higher-end sweet snack makers like BarkThins. It has also created new products, like chocolate-covered pretzels and Reese's snack mix, to get its brands into the snack aisle.
Ms. Buck defended the company's decision to spend money on improving its ability to get products to retailers on time and reduce instances where they run out of products. "As there's a pressured consumer retail environment, we all want to capture every sale that we possibly can," Ms. Buck said.
Executives at Pinnacle Foods Inc., which also reported its quarterly earnings Thursday, said it is also under more pressure from retailers to manage inventory and get products delivered on time.
The maker of Vlasic pickles and Aunt Jemima syrup said its revenue fell 1.2%. Its shares fell more than 1% in Thursday trading. However, Chief Executive Mark Clouse said its brands gained market share and that comparable sales rose 3.1%, thanks to Birds Eye frozen vegetables and Duncan Hines baking products.
Hershey, Pinnacle and their peers have struggled in recent years to adapt to Americans' desires for less-processed food that uses simpler ingredients. Pinnacle bought Boulder Brands in early 2016, giving it a foothold in gluten-free bread, organic frozen dinners and plant-based butter. Hershey has reformulated chocolate recipes to use real vanilla flavoring and remove high-fructose corn syrup.
In North America, Hershey's sales volume rose 1.6% in the quarter. "It seems that the overall indulgent snack category is continuing to hold up reasonably well, and Hershey is holding its own," Bernstein analyst Alexia Howard said.
Last year, Oreo cookie maker Mondelez International Inc. attempted to buy Hershey, arguing that it could help Hershey expand internationally. Hershey rejected the deal, and Mondelez ended its pursuit.
For the third quarter, Hershey reported profit of $273.3 million, or $1.28 a share in the latest quarter. Excluding certain one-time factors, earnings were $1.33 a share, compared with analysts' estimate of $1.29 a share, according to FactSet.
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(END) Dow Jones Newswires
October 26, 2017 12:55 ET (16:55 GMT)