Hershey Earnings: Upward Sales Trajectory Buoyed by Stepped-Up Brand Spending; Shares Not a Bargain

Wide-moat Hershey HSY 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.

To be sure, cost pressures (particularly for sugar and cocoa) have yet to abate, with management still calling for high-single-digit inflation this year. Despite this, Hershey eked out 130 and 70 basis points of expansion at the adjusted gross and operating margin lines to 45.2% and 22.9%, respectively. And we surmise Hershey will continue to tap multiple levers (raising prices, extracting inefficiencies, and altering price/packs) to dull inflation’s strain and fuel ongoing investments in its core operations.

When taken together, management held the line on its fiscal 2023 sales guidance at 8% growth but is now calling for adjusted EPS to come in at the lower end of the range (11%-12% growth), which square with our 8.1% and 11.2% respective preprint marks. As such, we don’t intend to alter our $192 fair value estimate (outside of a low-single-digit bump for time value). Even at a premium (about 20% above our intrinsic valuation), the stock is off about 15% from its peak earlier this spring, and we think investors should keep an eye on this name.