Hershey: Tasty Prospects

May 25, 2022 3:08 AM ETThe Hershey Company (HSY)COCXF, LDSVF, MDLZ, PEP5 Comments4 Likes
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Summary

  • Strong results in Q1 2022 with growth across all business segments.
  • Solid outlook for 2022 despite macro challenges and capacity constraints.
  • Long-term initiatives which include investments into confectionery capacity expansion, snack business expansion and supply chain resilience could support top line growth and margins.

Citing Rising Cost Of Ingredients, Hershey"s Raises Prices 8 Percent

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Hershey (NYSE:HSY) has had a solid quarter so far this year and the company is expected to deliver strong results for FY 2022 as well. The company has several initiatives in place to drive long-term growth including capacity expansion, and scaling its nascent snacks business. With the stock up 20% over the past year, the company's P/E is quite rich relative to peers. The stock is largely viewed as a hold.

Robust results in Q1 2022

Hershey's revenues rose 16.1% YoY to USD 2.67 billion driven by a 7% increase in prices and a 5% increase in volumes.

All segments reported robust growth: Hershey's biggest revenue segment - North America Confectionery (which accounts for Hershey's chocolate and non-chocolate confectionery including brands such as "Reese's", "Kisses", "Hershey's", and "Jolly Rancher", "Kit Kat"; gum, and refreshment products including its "Ice Breakers", "Breath Savers", and "Bubble Yum" mint and gum brands; protein bars including its "ONE" bar brand; spreads, snack bites and mixes sold under "Hershey's", Reese's", and "Lily's"; pantry products including baking products, toppings and sundae syrups; food service lines, and Hershey's retail business including Hershey's Chocolate World Stores) - saw revenues rise a healthy 11.7% YoY to USD 2.2 billion. Segment income rose 22% YoY to USD 781 million while segment margins improved to 35.3% from 32.4%.

Hershey North America Confectionery segment performance

Hershey 10Q Q1, 2022

Hershey's second biggest revenue segment - North America Salty Snacks (which accounts for Hershey's grocery and salty snack products which includes "Skinny Pop" popcorn, baked and trans fat-free "Pirates Booty" snacks, "Dot's Homestyle Pretzels", and non-GMO tortilla chips brand "Paqui") - saw revenues rise 87% YoY to USD 226 billion, largely driven by the acquisitions of Dot's Pretzels (the "fastest growing" U.S. pretzel brand), and Pretzels Inc (which manufacturers pretzels for Dot's and other customers including leading grocers and national brands) both of which were acquired in November 2021, and to a lesser extent by price increases on certain products and volume increases primarily from non-GMO and additive-free popcorn snack brand "SkinnyPop", and gluten-free puffed rice and corn snack brand "Pirates Booty". The revenue jump from the acquisitions helped the segment overtake Hershey's International segment to emerge as Hershey's second biggest business segment. The segment's income contribution however remains lower than the International segment.

Segment income declined 16% YoY to USD 21.3 million due to an unfavorable product mix, supply chain inflation, and higher advertising expenditure, partially offset by price hikes.

Hershey North America Salty Snacks segment performance

Hershey 10Q Q1, 2022

Hershey's third business segment - International (which accounts for all countries outside North America where Hershey manufactures and sells chocolate and non-chocolate confectionery and other products - which includes manufacturing facilities in Mexico, Brazil, India, and Malaysia, and export markets across all continents worldwide) - saw revenues rise 18% YoY to USD 223 million. Segment income surged 53% to USD 42 million driven by the company's International Optimization Program in China as well as volume and price increases. Segment profit margins jumped to 18.8% compared to 14.5% the previous year.

Hershey International segment performance

Hershey 10Q Q1, 2022

Near term outlook revised upwards

Capacity constraints (largely in Reese's - Hershey's biggest brand at more than USD two billion dollars in size and growing by double digits) may limit top line growth; sustained consumer demand and capacity constraints drove a 0.7% decline in Hershey's advertising and consumer marketing expenditure in Q1 2022, and continued near term capacity constraints may further limit top line growth going forward. Meanwhile, a possible erosion of consumer purchasing power in the coming quarters due to soaring food inflation and fewer government benefits could further impact Hershey's top-line growth.

Cost inflation stemming from the Ukraine war and supply chain disruptions have affected margins for numerous consumer packaged goods companies however Hershey has held up rather well with gross margins increasing to 46.7% in Q1 2022 from 45.7% the same quarter a year earlier. However, inflationary pressures are not expected to abate in the near term which could exert some pressure on margins however Hershey is working to mitigate the impact largely through supply chain efficiencies (although many players in the packaged goods space including Mondelez (MDLZ), Kraft Heinz (KHC) and Campbell Soup (CPB) are relying on pricing actions to preserve margins amid an inflationary environment, Hershey management has indicated pricing actions are not expected currently as pricing actions initiated earlier are flowing through).

Hershey results of operations

Hershey 10-Q, Q1 2022

Despite the challenges, the company raised their full-year 2022 sales and earnings outlook driven by sustained consumer demand and favorable price elasticities across all segments; Hershey expects net sales growth of 10%-12% compared with 8%-10% previously while adjusted profits are expected at USD 7.91 - USD 8.05 per share, compared with USD 7.84 and USD 7.98 earlier.

Hershey FY 2022 guidance

PR Newswire

Long term strategy includes efficiencies from restructuring, top line and bottom line expansion from snacks business, capacity expansion

Hershey has been steadily squeezing out greater cost efficiencies over the past several years. In Q1 2017, Hershey commenced a Margin for Growth program to optimize the company supply chain and operating model to reduce administrative expenses and generate long-term savings. There has been a noticeable improvement in the company's net margins since then, likely helped by the company's cost cutting effort.

Hershey net margin %

Author

Cost savings from the program also appear to have been a factor behind Hershey's growing operating cash flows which have been noticeably trending upwards since 2017.

Hershey operating cash flows

Author

In Q4 2020, Hershey commenced its International Optimization Program to streamline resources and investments in select international markets. Results have already begun to show with the International segment's margin rising from 6.6% in pre-pandemic year 2019, to 10.1% in 2021, partly driven by the company's Optimization (2020 segment margins were affected by a lower level of net sales owing to the Covid pandemic).

Hershey International segment performance

Hershey 10-K, 2021

Further cost savings from the ongoing program could potentially yield further improvements in margins and cash flows going forward.

Hershey is allocating capex into several areas to support top line growth going forward; capacity expansions are planned for its core confectionery business (its biggest business with North America alone accounting for about 85% of Hershey's total revenues). The company is also working on scaling its nascent salty snacks business; the division is relatively small accounting for about 6% of total revenues, but the savory snacks market in general is a growing market (driven by increased snacking by people working and studying from home, as well as health conscious trends prompting consumers to increasingly switch from sugary snacks to savory ones) which could not only support Hershey's top-line growth but could also offer the added benefit of reducing dependence on its core confectionery business. Scaling the snacks business (which is Hershey's lowest margin business currently) could also potentially deliver cost savings in procurement and sourcing which could potentially support margin expansion going forward.

The company is also making investments to increase supply chain efficiencies which could further help boost profitability.

Hershey capex

Hershey

Financials

Hershey's debt burden has been increasing over the past few years, as a result of its acquisition of Amplify Snack Brands, and Pirate Brands in 2018, One Brands in 2019, and Dots Pretzels and Pretzel's Inc in 2021.

Hershey's long term debt

Dec 2021

4,020.30

Dec 2020

4,013.90

Dec 2019

3,455.20

Dec 2018

3,152.30

Dec 2017

1,961.80

Dec 2016

2,347.50

Dec 2015

1,597.40

Dec 2014

1,542.30

Dec 2013

1,795.10

Dec 2012

1,531.00

The company however has improved its financial position with debt to equity steadily declining, but with a total debt to equity of 182%, the company's debt burden is quite high and could limit its ability to capitalize on acquisition opportunities, particularly in a climate of rising interest rates. Like several other consumer packaged goods giants such as Mondelez and Kraft Heinz who have been increasingly scooping up niche brands to reinvent their portfolios and keep up with changing consumption trends, Hershey too expects to remain acquisitive going forward.

Hershey debt to equity

Macrotrends

Summary

Hershey has reported strong results and the momentum is expected to continue this year despite macro challenges and capacity constraints potentially affecting revenues and margins. Longer term, the company is allocating capex to expand capacity at its core confectionery business as well strengthen its supply chain. Furthermore, Hershey's diversification into snacks is supporting revenue growth and the company's efforts to scale this nascent business could further fuel top line growth as well as support profitability through cost savings.

With Hershey's stock having enjoyed a 20% increase over the past year, the company currently trades at a P/E of 25 which is quite rich compared to Mondelez (P/E 20), but cheap compared to Swiss chocolate titan Lindt (P/E 46) (OTCPK:LDSVF). Hershey however has the highest short interest among the group. Hershey is also slightly pricier than PepsiCo (P/E 24) (PEP). The stock is largely viewed as a hold.

Hershey P/E

Seeking Alpha

Hershey

Mondelez

PepsiCo

Lindt

P/E

25

20

24

46

Market cap (USD billions)

43

85

225

24

Short interest

1.5%

0.8%

0.8%

-

Revenue growth YoY %

11%

7.9%

13.4%

14.3%

Gross margins %

45.5%

39%

53%

67%

ROA%

14%

4.6%

8.2%

4.8%

Total debt to equity %

182.3%

71.6%

218.6%

28.4%

Analysts are mostly neutral on the stock.

Hershey analyst ratings

WSJ

This article was written by

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Long only, focused on high quality businesses with economic moats and solid business fundamentals. Sector and geography agnostic. Long term investment horizon. None of the articles constitute investment advice.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a recommendation to buy or sell any stock mentioned. Please consult with a professional investment advisor prior to making any decisions.

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