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Hershey's (HSY) Innovations Look Solid, High Costs a Worry

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·5 min read
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The Hershey Company HSY looks well placed, courtesy of strength in its North America business. Also, the company’s focus on innovation and lucrative buyouts is yielding well. However, Hershey has been seeing weakness in the International segment for a while now. This, coupled with escalated costs, is concerning.

Let’s take a closer look.

North America Business Fueling Growth

The company has been benefiting from strength in the North America segment, which remained sturdy in fourth-quarter 2020. Notably, North America (the United States and Canada) net sales increased 8.9% year over year. Price realization contributed 1.1 point benefit, while volumes contributed 7.9 points, driven by solid seasonal performance in the unit. In fact, the company anticipates the recent momentum in the North America segment to continue into first-quarter 2021 on the back of increased sales of take-home and seasonal chocolates, along with added marketplace share gains.

Strength in the North America segment boosted overall results, with the top and bottom lines surpassing the Zacks Consensus Estimate in the fourth quarter. Moreover, sales and earnings increased year over year. For 2021, Hershey expects its performance to be in line with its long-term growth algorithm. The company anticipates net sales to rise 2-4% and projects earnings per share growth of 6-8% in 2021.

Other Factors Driving Growth

Hershey is a leading producer of quality chocolate products and markets brands which enjoy widespread consumer acceptance. The company is also a global leader in sugar confectionery products, which is an attractive category as confectionery products are easily available, affordable and highly indulgent, thus making the industry almost recession-resistant. Hershey’s core brands have been growing strongly on the back of advertising investments, in-store merchandising, and 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 fourth-quarter earnings call, management highlighted that it has an impressive lineup of innovations for 2021. In this regard, the company’s recently-introduced Reese’s Stuffed with Pretzels and Kit Kat Mocha products are yielding results. Further, Hershey is optimistic about the expansion of better-for-you confectionery platform with the launch of Kit Kat Thins as well as Zero-Sugar and Organic lines during the spring of 2021. The company also 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.

Moreover, 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 September 2018 to bolster its snacking business. Additionally, it has been gaining from Amplify Snack Brands, which was acquired in January 2018 to expand in the snacking category.

Is All Rosy for Hershey?

In fourth-quarter 2020, net sales in the International segment fell 17.3% year over year. Volumes in the segment hit sales by 10.1 points, mainly due to lower sales in the company's owned retail locations. Although retail locations reopened during the third quarter, footfall was low, stemming from reduced consumer travel and capacity restrictions imposed by governments amid the pandemic. Although Hershey anticipates a stable sales trend in majority of its markets in 2021, the speed and magnitude of recovery is uncertain in the segment.

Moreover, the company’s selling, marketing and administrative costs increased 4% due to increased advertising in the North America segment during the quarter. Notably, advertising and related consumer marketing expenses increased 4.9%. Further, selling, marketing and administrative costs, excluding advertising and related consumer marketing, increased 3.5%. Apart from these, Hershey remains exposed to volatile currency movements owing to its international presence.

Nevertheless, we expect the aforementioned upsides to help this Zacks Rank #3 (Hold) company in mitigating such headwinds. Shares of Hershey have gained 10.2% in the past year compared with the industry’s growth of 14%.

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