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Here's Why Hershey (HSY) Looks Tempting Post Q1 Earnings

Zacks Equity Research

The Hershey Company HSY appears tempting, courtesy of its solid first-quarter 2019 results. Markedly, shares of this chocolate maker have gained 6.2% since its earnings release on Apr 25. Moreover, this Zacks Rank #2 (Buy) stock has rallied 14.4% in the past three months compared with the industry’s growth of 13.2%.

Let’s delve deeper.  

Snapshot of Q1

Hershey’s first-quarter top and bottom lines came ahead of the Zacks Consensus Estimate and increased year over year. Earnings were backed by higher sales and enhanced margins, whereas sales were driven by improved volumes, gains from buyouts and higher net price realization. Also, e-commerce sales jumped about 50%, with the online chocolate share growing 120 basis points at the company’s core customers. Additionally, adjusted gross and operating margins improved on the back of lower raw-material costs, higher volumes and savings from the Margin for Growth Program.

Cost-Curtailment Efforts on Track

Notably, Hershey’s Margin for Growth Program is a multi-year initiative, per which it will reduce its global workforce outside the United States by 15%. This is also intended to improve overall operating margin through supply-chain optimization, a streamlined operating model and reduced administrative expenses. These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization.

Apart from this, Hershey focuses on optimizing its portfolio and is progressing well with its SKU rationalizing efforts. Additionally, the company has undertaken certain pricing initiatives to improve mix. Notably, net price realization had a 0.4-point benefit on Hershey’s top line in the recently reported quarter. Management expects further benefits from net price realization as the year progresses, which in turn is expected to continue fueling gross margin.
Buyouts & Innovation: Key Drivers

Hershey is also benefiting from robust buyouts and focus on innovation. Evidently, 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 the snacking category.  With several plans rolled up its sleeve to further strengthen the Amplify brands, the company expects greater yields from this buyout in the forthcoming periods. Also, in September 2018, the company acquired Pirate Brands, which is again aimed at augmenting the snacking business.

Hershey regularly brings innovation to its core brands to meet consumer demand. To this end, Hershey's Gold and Reese's Outrageous, which were launched in 2018, have been doing well. Further, the launch of Reese's Thins is drawing customers’ attention. The launch of Kisses brand in India is also reaping benefits. An important strategy of the company is to create a unique and holistic portfolio for every season, which can meet consumers’ seasonal shopping needs.

All said, we expect Hershey to remain on growth trajectory and continue being a preferred pick for investors. The company expects net sales to rise 1-3% in 2019, while adjusted EPS is envisioned to be $5.63-$5.74, indicating a 5-7% increase from the reported figure of 2018.

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