Hershey Co, the No. 1 candy producer in the United States, on Tuesday hiked its chocolate prices for the first time in three years, a sign that a year-long soaring cocoa market is eating into confectioners' profits.
The overall price increase, effective immediately, would be about 8 percent and was aimed at tackling rising commodity costs, the company said.
The maker of Reese's, Kit Kat and Ice Breakers candy expects 2014 sales growth to be at the lower end of its long-term target of 5 to 7 percent. It also expects diluted growth in adjusted earnings per share to be at the low end of its 9 to 11 percent target.
Adjusted gross margins were forecast to fall "slightly" in 2014 from last year, Hershey said. It had earlier expected full-year adjusted margins to expand by 50 basis points.
"Commodity spot prices for ingredients such as cocoa, dairy and nuts have increased meaningfully since the beginning of the year," Hershey's North America head Michele Buck said in a statement on Tuesday.
The price increases, which affect packaged candy and grocery products, would not have an effect on earnings until next year.
Customers who buy directly from the company will be able to buy at the pre-increase prices until Aug. 12.
Analysts said Hershey's price increase announcement will likely trigger a flurry of similar announcements from rivals such as Nestle SA and Kraft Foods Group Inc. Price increases are often done quietly, analysts said.
Hershey last raised wholesale prices in 2011 by roughly 9.7 percent in the United States, a company spokesman said.
Hershey publicly announced price hikes in 2008 and 2011, said Erin Lash, senior equity analyst for Morningstar, Inc., in Chicago.
"Usually it's followed by their competitors announcing price increases as well," Lash said.
Hershey owns the Cadbury license in the United States but didn't specify if its prices will be affected.
The cost of cocoa butter, a byproduct of the cocoa bean that gives chocolate its melt-in-the-mouth texture, has been high since late 2013. The cocoa butter ratio over the price of the bean now sits around 2.65 times, bringing the price above $8,200 per tonne for nearby needs.
Some analysts said they see this as the main driver in the price hike.
The move also comes a year after cocoa futures started their meteoric march to near-three-year highs earlier this month as traders worried that demand would outpace supply from the world's top-growing region of West Africa.
Hershey estimated adjusted profit between 75 and 77 cents per share on sales growth of 4.5 percent for the quarter ended June 29. This translates to sales of $1.58 billion.
Analysts on average were expecting earnings of 76 cents per share on revenue of $1.60 billion, according to Thomson Reuters.
(Reporting by Mridhula Raghavan and Sruthi Ramakrishnan in Bangalore and Marcy Nicholson in New York)