Hershey (HSY) benefits from prices, buybacks and costs – June 15, 2022

The Hershey Company (HSY Free Report) benefited from its strong pricing power and contributions from prudent acquisitions. These advantages, along with the strength of the company’s brand, drove its first quarter 2022 results, in which both top and bottom results exceeded Zacks’ consensus estimate and rose year over year. other.

That said, Hershey has struggled with higher sales, marketing, and administrative expenses for some time. In addition, supply chain inflation, increased investment in labor and rising costs to meet higher-than-expected demand are threatening margins. However, management raised the outlook for net sales and earnings per share (EPS) for 2022, given the strong performance in the first quarter and solid expectations for the rest of the year, despite an inflationary environment.

Management now expects net sales growth in the range of 10-12% for 2022. Previously, net sales were expected to grow 8-10%. Hershey now expects adjusted EPS to grow 10-12% for 2022, while reported EPS growth is expected to be in the 8-11% range. Previously, management expected Adjusted EPS to grow 9-11%, while reported EPS growth would likely be in the 7-10% range.

Factors driving Hershey

Hershey has undertaken strategic pricing initiatives to improve its performance. The net price realization drove HSY’s Q1 2022 revenue up 6.9 points due to higher list prices across all segments. In Confectionery North America, price realization contributed 6.8 points to growth. In the North America Salty Snacks segment, price realization contributed 13.2 points to the increase. In the International segment as a whole, price realization contributed 5.8 points to sales. Management expects prices to remain high for the rest of the year.

Hershey undertook buyouts to increase portfolio strength and increase revenue. In December 2021, Hershey acquired Dot’s Pretzels LLC – the owner of Dot’s Homestyle Pretzels, a leading brand in the pretzel category. The addition of Dot’s Pretzels fits perfectly with Hershey’s growing portfolio of savory snacks. The company also purchased Pretzels Inc. from a subsidiary of Peak Rock Capital. The acquisition further expands HSY’s snacking and production capabilities. On June 25, 2021, Hershey completed the acquisition of Lily’s, a leading brand of healthier confectionery. In the first quarter of 2022, sales of Pretzels, Dot’s and Lily’s buybacks resulted in a profit of 4.6 points for the company’s revenue.

Hershey regularly brings innovations to its core brands to meet consumer demand and needs that are not catered for by its current portfolio. In Q1 2022, SkinnyPop saw impressive retail sales growth of over 13%, while Pirate’s Booty retail sales increased by 55%.

In the first quarter, adjusted earnings of $2.53 jumped 31.8% year-over-year and beat Zacks’ consensus estimate of $2.10. Consolidated net sales of $2,666.2 million were up 16.1% from the year-ago quarter level and beat Zacks’ consensus estimate of $2,474.1 million. Organic revenue at constant currencies increased by 11.5%. Higher prices, improved volumes and the contribution from buybacks boosted quarterly performance. Strong consumer demand driven by sustained at-home consumption in an inflationary environment was a driver. The company experienced growth in all of its segments.

Image source: Zacks Investment Research

Main Headwinds

In the first quarter of 2022, selling, marketing and administrative expenses increased 6% year-over-year, primarily due to higher depreciation and operating expenses associated with recent buyouts . Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 9.9%, primarily due to higher amortization and operating expenses associated with recent buyouts and additional technology capabilities and investments.

In the first quarter, gross margin was impacted by general supply chain inflation, increased labor investments and increased costs to meet higher than expected demand. A negative mix due to recent takeovers and the accelerated growth of the North America Salty Snacks unit also weighed on performance. Although Hershey has raised its earnings outlook for 2022, it expects supply chain inflation and rising costs to meet increased demand to persist. The Russo-Ukrainian war added further complications to the cost of commodities and to the structure of supply and availability. Hershey expects inflation to rise in 2022 due to escalating spending on raw materials, packaging and logistics resulting from a challenging geopolitical landscape. Management expects gross margin to contract by 120 to 140 basis points for the full year of 2022.

Shares of this Zacks Rank #3 (Hold) company are up 8.6% over the past six months, compared to an 87.3% rise in the sector.

3 strong base stocks

Some higher ranked stocks are Pilgrim’s Pride (CPC free report), Sysco Corporationnot (SYY free report) and Medifast (WAY free report).

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, boasts a Zacks #1 (Strong Buy) rating. Pilgrim’s Pride has a four-quarter earnings surprise of 31.4% on average. You can see the full list of today’s Zacks #1 Rank stocks here.

The Zacks consensus estimate for PPC’s current-year EPS suggests growth of nearly 43% from the figure reported a year ago.

Sysco, which is engaged in the marketing and distribution of a variety of food and related products, sports a No. 1 Zacks rank. Sysco has a four-quarter earnings surprise of 9.1%, on average.

Zacks’ consensus estimate for SYY’s current-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the number reported a year ago.

Medifast, which manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products, currently carries a Zacks rank of No. 2 (purchase). Medifast has a four-quarter earnings surprise of 12.9% on average.

Zacks’ consensus estimate for MED’s current-year sales and EPS suggests growth of nearly 19% and 13.4%, respectively, from the figure reported a year ago.

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