Will Product Innovation Drive Hershey's (HSY) Sales in 2018?

The Hershey Company HSY regularly innovates to cater to changing consumer behavior. Products like Cookie Layer Crunch, Popped Snack Mix and Chocolate Dipped Pretzels have significantly contributed to the company’s growth in 2017.

Hershey has already launched Hershey's Gold in an instant consumable pack type. The company plans to launch take-home packages in the second quarter of 2018, which is likely to drive sales in the second half of the year. The same holds true for Reese's Outrageous.
 
The company’s core chocolate brands — Reese's, Hershey's, Kit Kat and Kisses — continue to drive growth. In 2017, the combined retail takeaway on these power brands increased about 5%. The momentum is expected to continue in 2018. Moreover, the company plans to improve the performance of select candy brands, which are likely to be positive contributors to marketplace performance in 2018.

The acquisition of Amplify broadens participation in salty snacks, one of the fastest growing sub segments. The transaction is slated to close in the first quarter of 2018 and is expected to be accretive to Hershey's earnings in the first year following the closure. Overall for 2018, the company expects sales to increase 5-7%. The Zacks Consensus Estimate for revenues is pegged at $7.94 billion, reflecting an improvement of 5.7% year over year.

Apart from product innovation, let us delve into some of the key factors which are likely to affect the company’s performance in 2018.

Marketing Initiatives to Increase Visibility

Considering the sluggish sales performance, introducing innovative products is not enough. Packaging and marketing initiatives are also required to ensure strong customer outreach. The company is transitioning from lay-down bags to stand-up pouches on core chocolate candy products. These ensure that products get on the shelf quicker with less in-store labor and improve shopping experience.

While these packaging initiatives will adversely impact gross margin in 2018, the company believes that this is the right long-term investments which will improve shelf presence and visibility in 2018. Hershey has also made solid progress in key capabilities, such as multiyear ERP program and e-commerce.

Cost-Saving Initiative to Offset Expenses

Higher freight and logistics cost hurt margins and are expected to be a headwind in 2018. Also, increased packaging costs and unfavorable mix are dampeners. Adjusted gross margin in 2018 is expected to be flat year over year. Nevertheless, Hershey’s productivity and cost-saving initiatives should offset higher costs. Savings from the Margin for Growth program are estimated in the range of $55-$65 million in 2018.

China Business to Mar Sales Volume

The implementation of Margin for Growth program in China is driving majority of the improvement. However, China SKU analysis and optimization efforts dented gross sales volume in 2017 and will continue to do so this year.

Meanwhile, Hershey expects operating income to increase in North America and International as well as Other segments in 2018. Considering the planned capability investments — such as digital commerce — North America will not improve as much on a percentage basis as the International and Other segment.

Bottom Line

Hershey’s strong U.S. marketplace presence and solid financial position provide the flexibility to invest in confectionery and other salty snacks as well as in the capabilities that lend the company a competitive edge over peers like The J. M. Smucker Company SJM, Hostess Brands, Inc. TWNK and The Simply Good Foods Company SMPL.

Product innovation, acquisition of Amplify and savings from Margin for Growth program are expected to boost earnings in 2018 despite higher expenses. The company expects adjusted earnings per share in the range of $5.33-$5.43, reflecting a 12-14% increase from last year. The Zacks Consensus Estimate for the same is pegged at $5.36, showing an improvement of 12.6% year over year.

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