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Hershey says it had a game-changing year. Wall Street thinks otherwise

Brian Sozzi
Hershey shares came under pressure after third quarter results. CEO Michele Buck tells Yahoo Finance there are reasons to be optimistic.
Hershey shares came under pressure after third quarter results. CEO Michele Buck tells Yahoo Finance there are reasons to be optimistic.

Hershey CEO Michele Buck thinks the 124-year-old candy maker is headed down one sweet path, but Wall Street isn’t so sure.

Investors punished Hershey’s (HSY) stock on Thursday as the maker of Kisses and Reese’s peanut butter cups missed slightly on third-quarter analyst estimates for sales. Adjusted earnings of $1.55 a share came in line with forecasts. Similar to other packaged-food giants in the quarter, profits were pressured by rising transportation costs and fierce competition.

To combat the inflationary headwinds, Hershey said it would raise prices on about one-fifth of its products by 2.5% next year.

Hershey shares plunged as much as 8.3% intraday on Thursday, the worst move since August 2016. The stock finished the day down 4.9%.

Year to date, Hershey’s shares have lagged the S&P 500 by about nine percentage points.

“Hershey’s third-quarter tepid top line and gross margin shortfall underscore the key drivers of our underweight thesis including: (i) soft category growth and share weakness; (ii) ongoing gross margin headwinds; and (iii) outlook for increased reinvestment,” wrote Morgan Stanley analyst Pamela Kaufman in a note. Kaufman sees the stock dropping to $98 from $102 currently.

The tone at Goldman Sachs wasn’t much better. Analyst Jason English left his sell rating on Hershey intact after the earnings report, voicing concerns about competitive pressures and valuation.

Wall Street missing the point?

An argument could be made, though, that investors are overlooking a lot of positives at Hershey. Chief among them is the pivot to higher-margin snack foods. Since taking over as CEO in March 2017, Buck has spent more than $2 billion to scoop up popular snack brands, including Amplify Brands (maker of SkinnyPop) and Pirate’s Booty. Not only have each brought Hershey into new, healthier aisles (and new customers that love to snack on the go) in retail stores, but it sets the stage for a host of chocolate-based snacks well into the future.

In Wall Street lingo, that’s called synergies.

“I do think it was a game-changing year for Hershey,” Buck told Yahoo Finance when asked how she would sum up 2018.

And as icing on the proverbial candy bar, Hershey delivered on several fronts in the third quarter.

REUTERS/Joshua Lott
REUTERS/Joshua Lott

Quarterly wins:

  • The company called out sequential market share gains on the back of success in Halloween candy and new offerings

  • Reaffirmed full-year profit outlook

  • SkinnyPop sales up 8%

  • Sales from digital channels surged 60%

Is Hershey a high-growth juggernaut? No. But from accelerating the pace of new product introductions to finding success online, Hershey is showing it deserves more credit from Wall Street.

Yahoo Finance caught up with Buck post-earnings release to discuss what the chocolate maker is focusing on. What follows is an edited and condensed version of the conversation.

Yahoo Finance: Game-changing year for Hershey?

Michele Buck: I do think it was a game-changing year for Hershey. As I talk to the company about what we are trying to do, I talk about it as a transformation. We want to continue to do really well all the things we have done well that are still relevant, that is focused on our confectionary business, our iconic brands, partnering with retailers in a strategic way.

But the world has changed and we need to change. We always have evolved. But the world is changing faster than ever before.

So we really need to evolve on every level to keep up with that and take advantage of the opportunities. Whether that’s the consumers shopping more online and building a digital commerce business that lets us do that. There is more data availability, so we have redone our systems to take advantage. Our systems were 30 years old, our modernization will let us go to the next level.

Part of this is a cultural transformation, too… We wanted to keep all the things in the culture that are great. It’s a company of tremendous integrity and high values. A focus on quality and doing the right thing and serving a greater purpose, such as funding the Hershey school and giving back. The change is palpable.

I would say even at our last board meeting the board noted how they can feel the change in culture when they talk to our employees.

Yahoo Finance: Coca-Cola has also been making some big changes to transform itself; ditto PepsiCo. How hard is it to evolve an iconic brand while staying true to why it was founded in the first place?

Buck: It’s definitely a balancing act, but I think our expansion across snacking is close to what we do because of the similarities. Confections are a snack. At the same time, change is hard for people. But I look at a lot of the evolutions in the marketplace and there has always been evolution. I can recall when the big thing in retail when grocery stores and big box retailers like Walmart and Target coming onto the scene. And then there were dollar stores. Then people starting to pay for their gas at the checkout.

Yahoo Finance: Where else in snack category are you looking to do deals?

Buck: We are constantly evaluating and exploring in the marketplace. We felt really good about the warehouse delivered snack category we have entered with Pirate’s Booty and Amplify. It has kind of diversified our portfolio, getting us into salty snacking, for example. And frankly, that warehouse delivered snack aisle represented a lot of opportunity as it didn’t have one clear leading player.

I can’t say there is one specific spot of focus that is next. I would say there are a couple different areas that could hold promise for us. But part of that depends on the asset and whether we think we can build scale around a certain area.

Yahoo Finance: So you’re still hunting for deals even though you are still integrating two large ones?

Buck: Absolutely. We are constantly evaluating the marketplace. Certainly, we are focused on continuing to drive SkinnyPop and beginning to integrate the Pirate’s brand. But at the same time, we don’t take a pause in looking for assets because the one thing with M&A is that it’s based on timing and availability.

Yahoo Finance: You called out distribution gains and success in Halloween candy in the third quarter. Seems surprising given the ongoing health and wellness push among consumers.

Buck: If you look at the growth in indulgent categories you will see them growing right along with better-for-you categories. Consumers don’t always do what they say they are going to do.

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Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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