Company Reports

Consumers' hunger for confectionery and snacking fare has yet to be fulfilled, as evidenced by Hershey's outsize organic sales growth the past few years. But from where we sit, this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past seven years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise its competitive position lags its global peers).

Confectionery firms have been dogged by the more than threefold increase in cocoa costs since the start of the year. Despite this spike, which contributed to a 130-basis-point swoon in Hershey’s adjusted operating margin to 26.5% in the first quarter, we’ve long held that as the leading domestic chocolate manufacturer with more than one third share, it can use multiple tactics to dull a lasting hit to profits. In this vein, management conveyed that its cocoa needs are covered for the year, and beyond hedging, we think Hershey can also employ a combination of price increases, price/pack alterations, and efficiency improvements if the recent surge shows staying power.

Consumers' penchant for confectionery and snacking fare has yet to be fulfilled, as evidenced by the outsize organic sales growth Hershey has chalked up the past few years. But from our vantage point, this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past seven years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise its competitive position lags its global peers).

Shares of wide-moat Hershey languished the past year on concerns around intensifying competition. But this angst seems to be reversing, as the stock soared by a mid-single-digit percentage, even as the firm ended fiscal 2023 on a bitter note. In the fourth quarter, the adjusted gross margin ticked up 50 basis points to 44.2%, but organic sales slipped 0.1%, as the benefit from higher prices was washed out by a retreat in volumes. While a portion of this sales shortfall was a byproduct of a planned reduction in salty snacks inventory, after it shot up in advance of its fourth-quarter ERP implementation, management also highlighted that consumers are showing an increased penchant for value, which constrained purchases of everyday chocolates.

Consumers' penchant for confectionery and snacking fare has yet to fulfilled, as evidenced by the outsize organic sales growth Hershey has chalked up the past few quarters. But from our vantage point, this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past six years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

While our $196 fair value estimate shouldn’t see much change, the market continued to sour on wide-moat Hershey despite fair third-quarter marks: 10.7% organic sales growth, 240 basis points of adjusted gross margin expansion to 44.9%, and a 230-basis-point bump in adjusted operating margin to 24.9%. In this context, Hershey’s stock price is down around 17% since January but has slid around 30% from its peak in early May.

While consumers are facing mounting costs in a number of areas of their lives, this has yet to temper their appetite for confectionery and snacking fare, as evidenced by the outsize organic sales growth Hershey has chalked up the past few quarters. But from our vantage point, this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past six years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

Wide-moat Hershey continues to ride the wave of consumers’ undying penchant for indulgent fare. Organic sales edged up 5% in the second quarter, reflecting a nearly 8% benefit from higher prices partially offset by a modest 2.7% downdraft in volumes (partly due to lapping pronounced retailer inventory stocking last year). And we’re encouraged it continues to funnel resources toward its brands, with advertising spending up nearly 15% in the period. This aligns with our forecast for Hershey to expend a high-single-digit percentage of sales (nearly $1 billion) toward research, development, and marketing annually. Further, we see prudence in efforts to build out its capacity, boost its digital prowess, and enhance its supply chain (with capital expenditures set to hit 7%-8% of sales this year, about 200-300 basis points north of its historic average) to ensure agility as it contends with macroeconomic and competitive headwinds.

While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame their appetite for confectionery and snacking fare, as evidenced by the double-digit organic sales growth Hershey has chalked up the past few quarters. But from our vantage point, this isn't merely a byproduct of a favoarable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past six years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

Wide-moat Hershey’s mix of leading confectionery and salty snack fare continues to win with consumers, as evidenced by its 12% increase in first-quarter organic sales (a 9% benefit from price and around 3% volume growth). This mark is even more impressive when juxtaposed with the 11.5% gains posted a year ago.

Wide-moat Hershey’s competitive prowess was on full display during its latest investor day in Hershey, Pennsylvania. But despite its recent success (boasting mid-single-digit annual sales growth and 200 basis points of operating margin expansion to 23% since CEO Michele Buck took the helm in 2017), management seems intent to charge ahead, prioritizing investments to enhance its capabilities and brand standing through stepped-up innovation, marketing, and distribution. This should ensure its fare wins with consumers and its entrenched retail standing doesn't waver. Even so, we view shares as quite rich, trading at a 35% premium to our $180 fair value estimate (which remains in place), underpinned by our expectations for 3.9% average annual sales growth in the long term (at the high end of management’s 2%-4% target), against operating margins that hold in the low-20s through fiscal 2032.

While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame their appetite for confectionery and snacking fare, as evidenced by the double-digit organic sales growth Hershey has chalked up the past few quarters. But from our vantage point, this isn't merely a byproduct of a favoarable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past five years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

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.

While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame their appetite for confectionery and snacking fare, as evidenced by the double-digit sales growth Hershey has chalked up the past few quarters. But from our vantage point this isn't merely a byproduct of a favoarable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past five years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame their appetite for confectionery and snacking fare, as evidenced by Hershey’s stellar third-quarter top-line marks. Organic sales popped nearly 12% (reflecting almost 8% higher prices and around a 4% benefit from increased volumes and favorable mix), with growth across its domestic confectionery (up 10.7% organically) and salty snacks (21.5%) lineup. We see this as a byproduct of Hershey’s unwavering commitment to invest to support its business long term.

Wide-moat Hershey's dominance in U.S. confectionery is undeniable (46% share of the chocolate aisle versus just 1% for private label, as cited by the firm, according to IRI). And we don't think consumers’ penchant for indulgent fare is showing signs of waning, as evidenced by the 14% organic growth marks Hershey chalked up in the second quarter. But from our vantage point this isn't merely a byproduct of a favoarable demand environment. More so, we applaud the strategic focus CEO Michele Buck has brought to bear over the past five years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

Wide-moat Hershey's dominance in U.S. confectionery is undeniable (46% share of the chocolate aisle versus just 1% for private label, as cited by the firm, according to IRI). And we don't think consumers’ penchant for indulgent fare is showing signs of waning, as evidenced by the 14% organic growth marks Hershey chalked up in the second quarter. But from our vantage point this isn't merely a byproduct of a favoarable demand environment. More so, we applaud the strategic focus CEO Michele Buck has brought to bear over the past five years--ramping up investments in its core domestic brands while pulling back in its international arm (high-single-digit percentage of total sales, where we surmise it lacks a competitive edge).

Consumers’ penchant for indulgent fare is in overdrive, as evidenced by the 14% organic growth marks wide-moat Hershey chalked up in the second quarter (due to 9.5% higher prices and a 4.6% bump in volumes). However, the firm isn’t immune to current challenges, particularly widespread inflationary headwinds and unrelenting supply chain disruptions. These contributed to its 250- and 90-basis-point degradation in the adjusted gross and operating margin lines, respectively, to 43.9% and 22.2% in the quarter. It is unlikely these pressures are to abate, as management qualitatively suggested ingredient scarcity and higher dairy supply chain costs could lead to stepped up costs the next several quarters.

Even in the face of competitive and macroecomic headwinds, wide-moat Hershey's dominance in U.S. confectionery is undeniable (46% share of the chocolate aisle versus just 1% for private label, as cited by the firm, according to IRI). But more so, we applaud the strategic focus CEO Michele Buck has brought to helm--ramping up investments in its core domestic brands while pulling back international (high-single-digit percentage of total sales) spend.

Wide-moat Hershey has been firing on all cylinders. Organic sales shot up 11.5% in the quarter, reflecting a 7% increase in price and almost 5% volume growth—particularly impressive when viewed against the 13% gains in last year’s first quarter. We attribute this performance to investments to ensure Hershey's mix evolves with consumer trends, combined with a commitment to market behind its fare over a longer horizon. Advertising spending was down nearly 1% in the period, but we believe this course was undertaken to avoid touting brands where supply was insufficient; we see this as prudent, to avoid frustrating consumers and retailers, but not representative of a strategy shift. As such, we continue to forecast Hershey will expend a high-single-digit percentage of sales on average annually ($800 million) on research, development, and marketing.