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Buyouts, Cost-Saving Efforts to Keep Hershey's Solid Show On

Zacks Equity Research

The Hershey Company HSY is well positioned, courtesy of its robust endeavors like focus on buyouts, strong innovations and solid cost-saving initiatives. These aspects are likely to continue driving the renowned chocolate maker amid hurdles like low international presence.

Factors Working Well for Hershey  

Hershey has been undertaking buyouts to augment portfolio strength and boost revenues. Net impact from buyouts and divestitures boosted sales growth by 0.9 points during the first quarter of 2019. Hershey’s top line is steadily gaining from Amplify Snack Brands, which was acquired in January 2018 to expand in the snacking category. The company expects greater yields from this buyout in the forthcoming periods.

Also, in September 2018, the company acquired Pirate Brands from B&G Foods BGS, which is also aimed at augmenting the snacking business. Notably, net impact from the buyouts and divestitures is expected to leave roughly 0.5-point positive impact on net sales in 2019. We note that many food companies like Campbell Soup CPB and Mondelez MDLZ, among others, opt for growth via acquisitions.

Hershey’s core brands — Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher. Brookside, Sofit and Ice Breakers — have been growing strongly on the back of advertising investments, in-store merchandising, and programming and innovation. The company regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. In this respect, its Gold and Reese's Outrageous, which were launched in 2018, have been doing well.

Will Growth Continue?

However, Hershey has a low international presence, and approximately 88% of the company’s revenues were generated in the United States in 2018. Though the company is accelerating investments in the overseas markets, some competitors have a stronger presence outside North America. Despite a low international presence, Hershey is exposed to volatile currency movements. Markedly, currency had an adverse impact of nearly 20 bps on the company’s top line in the first quarter of 2019. In the International and Other segments, currency headwinds hurt net sales by 3.5%.

Nevertheless, we expect Hershey to continue with its splendid growth story on the back of the aforementioned drivers and cost-saving initiatives. Notably, the company is well on track with its Margin for Growth multi-year program. This initiative is intended to improve overall operating margin through supply-chain optimization, a streamlined operating model and reduced administrative expenses.

Additionally, the company has undertaken pricing initiatives to improve mix. Notably, net price realization had a 0.4-point benefit on Hershey’s top line in the quarter under review. Together, higher sales, reduced costs and savings from the Margin for Growth program (in the international segment) led to adjusted gross margin expansion of 80 bps. Management expects further benefits from net price realization as the year progresses, which in turn is expected to continue fueling gross margin growth.

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Hershey Company (The) (HSY) : Free Stock Analysis Report
B&G Foods, Inc. (BGS) : Free Stock Analysis Report
Mondelez International, Inc. (MDLZ) : Free Stock Analysis Report
Campbell Soup Company (CPB) : Free Stock Analysis Report
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