Hershey Co. (NYSE: HSY). This financially strong company has a focus on shareholder returns, with a stock buyback program and a record of increased dividend payments. It is also posting strong e-commerce sales, and benefiting from price increases, more focused marketing and supply chain investments, and the recent acquisition of Amplify Snack Brands. Those are the positives. On the other side of the ledger, Hershey has faced slower volume and organic growth, rising input costs, and margin pressure. We will look to return HSY to our BUY list on signs of further margin progress.
HSY shares have also underperformed the iShares US Consumer Goods ETF (IYK) this year.
On November 6, Hershey posted 3Q20 adjusted EPS of $1.86. Sales grew 4.0% to $2.22 billion on a 3.8% increase in organic growth, driven by confectionery gains in the U.S. as overall consumption of sweets increased. Sales included a 2.9 point benefit from higher realized prices, a 0.9 point benefit from stronger volume and a 0.8% gain from acquisitions net of divestitures which offset a 0.6% currency headwind.
Reflecting higher net realized prices which were partially offset by COVID-19-related costs and unfavorable commodities.
However, along with the 3Q results it reinstated it. It expects adjusted EPS growth of 7%-8% to $6.18-$6.24, full-year sales growth of 1.0% with 4Q organic net sales growth in-line with the third quarter. It expects capital expenditures to be $400-$450 million, and elevated through 2022 due to supply chain projects that will begin in 4Q.
In an effort to expand into the salty snack market, Hershey recently acquired Amplify Snack Brands for $1.6 billion including debt. It also acquired Pirate Brands for $420 million in October 2018. In September 2019, Hershey acquired nutrition bar company ONE Brands, LLC for $397 million. In 2020, Hershey plans to introduce Kit Kat Duos innovation, York THiNS, and Reese’s white THiNS. In 2Q, the company divested the Krave, Dagoba and Scharffenberger brands.
EARNINGS & GROWTH ANALYSIS
Hershey organizes its business into two divisions.
The North American division posted 3Q20 sales of $2.01 billion, up 6.3% on organic, constant currency sales growth of 5.5%. Price realization and volume net acquisitions and divestitures were a benefit of 3.3% and 2.2% respectively, and net acquisitions and divestitures contributed 0.9%, which offset a 0.1% unfavorable impact from foreign currency. North American earnings rose 13.5% to $647.1 million, though promotional spending decreased 3.1%. The company again gained share in the U.S. confection segment. Total U.S. retail takeaway grew 6.6% on strong sales of chocolate, salty snacks, and baking items-as growth in syrup, cocoa, and chips remained strong; declines in baking food services, refreshment products and specialty retail partially offset these gains. E-commerce grew 80%, not as strong as the second quarter’s 200% growth due to the fall off in home shipments of meltable products during the summer months; management expects stronger sequential e-commerce growth in 4Q.
In the International and Other segment, 3Q sales fell 14.4.0% to $205.7 million, driven by a decline in volume of 9.6.3%, an unfavorable 5.1% foreign currency impact, which offset a favorable 0.3% price impact. Performance was driven by significant declines in the company’s owned retail outlets as traffic remained slower, and a 13.9% decline in its focus markets (Mexico, Brazil, India and China) due to COVID-19-related disruptions and foreign currency headwinds. Segment income declined 37.8% to $24.5 million. While it expects sales trends to improve, management expects a slower recovery in the International segment due to COVID-19-related restrictions and economic conditions.
Based on recent results and management’s guidelines, and reflect our expectations for continued near-term challenges the International and Other segment.
FINANCIAL STRENGTH & DIVIDEND
Moody’s rates Hershey’s long-term debt as A1. Standard & Poor’s has an A rating with a negative outlook. In 2Q, the company issued $1 billion of bonds with staggered maturities, and paid down $350 million in long-term debt.
Cash and equivalents grew to $1.2 billion from $493 million.
Hershey did not repurchase any of its common stock in 2Q or 3Q and had $260 million remaining on its $500 million buyback authorization, which began in July 2018.
HSY increased its dividend by 4% in July 2020. The current quarterly rate is now $0.804 per share.
MANAGEMENT & RISKS
Michele Buck became the company’s new CEO on March 1, 2017 following the retirement of John Bilbrey. In April 2019, the company announced several new executive appointments, including Steve Voskuil, who succeeded Patricia Little as CFO following her retirement.
As a snack and confectionary company, Hershey is subject to input cost inflation, which has been high in recent years. The company requires large amounts of sugar, sweetener, peanuts, cocoa, dairy products, and plastic packaging.
Health concerns related to diabetes are always a concern, and producers of confectionary products have been a frequent target of critics. We note that after years of growth, the number of diabetes cases in the U.S. appears to have stabilized.
Hershey is also facing additional international competition following Kraft’s acquisition of Cadbury. At the same time, the company has relatively less exposure to exchange rate movements given that most of its business is still based in the U.S.
Hershey Co. produces and markets chocolate and other confections, as well as chocolate-related grocery products. Its major brands include Hershey’s, Jolly Rancher, Kit Kat, Heath, Twizzlers, Reese’s, Ice Breakers and SkinnyPop. Hershey has expanded into new categories and markets in recent years with the acquisitions of Brookside, Krave, Shanghai Golden Monkey, Ripple Brand Collective, and Amplify Snack Brands. The company’s largest shareholder is the Hershey Trust Company.
The stock trades at 24.4-times our 2020 non-GAAP EPS forecast and 22.8-times our 2021 forecast, at the high end of its historical range and above the peer average of 19.5. Peers include Kellogg (K), Tyson Foods (TSN), Hormel Foods (HRL), General Mills (GIS) and Mondelez (MDLZ).
On November 10, HOLD-rated HSY closed at $15.26, up $2.54.