The Hershey Company HSY appears well placed on the back of brand strength. To this end, the company’s focus on innovation and prudent buyouts are yielding. Apart from this, management is impressed with consistent momentum in the North America segment along with robust rebound in the International & Other segment.
Let’s delve deeper.
Solid Performance & Raised View
Hershey is benefiting from strength in the North America segment, which remained sturdy in first-quarter 2021. Moreover, stronger than anticipated consumer mobility caused growth in the company’s International & Other segment. Incidentally, solid performance in the segments drove first-quarter results with the top and the bottom line surpassing the Zacks Consensus Estimate and increasing year over year.
Owing to solid first-quarter performance and impressive projections for the rest of the year, the company raised its 2021 view. Incidentally, management noted that greater-than-anticipated consumer mobility as well as increased distribution and merchandising opportunities in North America confection are driving growth. Hershey now expects 2021 net sales to increase 4-6%. Earlier, management had guided for net sales growth of 2-4%. Further, the company now projects adjusted earnings per share in the range of $6.79-$6.92, which suggests growth of 8-10% year over year. Notably, the metric came in at $6.29 in 2020. Prior to this, the metric was expected to grow 6-8%. We note that the Zacks Consensus Estimate for 2021 earnings has moved up from $6.72 per share to $6.88 per share in the past 30 days.
Key Growth Drivers
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 as well as programming and innovation. In fact, Hershey regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. In its last earnings call, management highlighted that it is on track with several innovations. In this regard, the company’s take home items like Kit Kat Thins and our Zero Sugar products are being rolled out. Also, the company is committed toward supporting its brands through solid media marketing. The company had earlier informed that its sugar free platform has been yielding. An important strategy of the company is to create a unique and holistic portfolio for every season, which can meet consumers’ seasonal shopping needs.
Apart from this, Hershey has been undertaking buyouts to augment portfolio strength as well as boost revenues. The company acquired ONE Brands, LLC in September 2019 to solidify its footing in the snacking category. Prior to this, the company acquired Pirate Brands in October 2018 to bolster the snacking business. Additionally, the company is gaining from Amplify Snack Brands, which was acquired in January 2018, to expand in the snacking category. During its first-quarter earnings call, management highlighted that its Amplify business is performing well, with retail sales increase of 9% for the year-to-date period ending April 18. The upside was driven by SkinnyPop that increased 14.6% during that time.
Is All Rosy for Hershey?
During the first quarter, Hershey’s adjusted gross margin contracted 80 basis points to 45.8% owing to raw material and packaging cost inflation, along with higher supply chain costs. Apart from this, selling, marketing and administrative costs increased 4.1% due to increased advertising in the North America segment and corporate expenses. Advertising and related consumer marketing expenses rose 2.8% due to higher investments in core brands, innovation as well as greater sponsorships in North America. Further, selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 4.8% thanks to higher accruals for incentive compensation as well as greater investments in capabilities and technology.
Moreover, Hershey is exposed to volatile currency movements owing to its international presence. Markedly, currency had an adverse impact of 0.1 points on the company’s top line in the first quarter. The same hurt net sales in the International and Other by 3.7 points in the quarter.
Nevertheless, we believe that the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company keep its growth story alive. Shares of Hershey have gained 15.9% in the past three months compared with the industry’s growth of 13.8%.
Some Solid Food Bets
Medifast, Inc. MED, currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Hain Celestial Group, Inc. HAIN, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 26.4%, on average.
Pilgrim’s Pride Corporation PPC, currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 27%.
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