Hershey's Marks Strike a Sweet Note, but We Think Investors Should Refrain From Indulging in Shares

The resilience of wide-moat Hershey’s stout brand mix and the prudence of its strategic course were again on display in the fourth quarter. Organic sales popped 10.7% on the heels of an 8.5% benefit from higher prices and a 2.2% contribution from increased volumes and favorable mix. And despite persistent inflation, Hershey’s efforts to raise prices and extract inefficiencies resulted in a 20-basis-point increase in adjusted gross margin to 43.7%. But we don’t surmise management is content to rest on its laurels, as it plans to beef up investments to enhance its capabilities, integrate its recent salty snack acquisitions, build out capacity for its core confection brands, and support its brand reach—judicious spending from our vantage point. In this context, Hershey is targeting $800 million to $900 million in capital expenditures in fiscal 2023 (which equates to 7.5%-8% of sales), far outpacing the 4%-5% of sales that it has historically spent. Further, the firm is calling for a double-digit bump in advertising in the year ahead; our long-term forecast calls for Hershey to expend a high-single-digit percentage of sales toward research, development, and marketing annually to ensure it remains entrenched with its retail partners and that its brands stand out at the shelf.