The Hershey Company (HSY - Free Report) appears to be in good shape, courtesy of its brand strength. This can be attributed to the company’s focus on innovation and prudent buyouts. Also, Hershey’s pricing initiatives are yielding well. Apart from this, management is impressed with sales growth in North America even in the face of coronavirus-related hurdles.
However, soft volumes in the International and Other segment were a deterrent for Hershey’s top line in the second quarter of 2020. Also, the company’s gross margin contracted due to high coronavirus-related manufacturing costs and adverse mix. Although persistence of elevated pandemic-related costs is a concern, Hershey’s cost-cutting actions and price realization are likely to provide cushion. On the sales front, the company is expected to gain on North America unit strength in the second half.
Markedly, shares of the Zacks Rank #3 (Hold) company have gained 10.3% in the past three months compared with the industry’s growth of 8.9%. Let’s delve deeper and see if Hershey can keep its impressive show on.
Strong North America Sales
In the second quarter of 2020, Hershey’s solid brands helped it gain confectionary market share of 225 basis points. We note that net sales in North America improved 1% year over year to $1,583.8 million. Strength in the confection business in measured channels offset declines in the non-traditional channels like food service and specialty retail. Confection business was backed by increased at-home consumption and solid price realization. The company witnessed strength in food, mass, dollar and e-commerce channel. Club, drug and convenience categories were under pressure, though trends have improved sequentially as consumers returned to normal activities.
Management expects stronger second-half sales in the North America unit, backed by continued higher at-home consumption, sales recovery in food service and specialty retail networks, price realization as well as replenishment of retailer and distributor inventory levels. In its second-quarter earnings call, the company stated that it expects overall sales growth to accelerate in the second half of the year.
Hershey’s core brands — Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher, Brookside, Sofit and Ice Breakers — have been growing strongly on the back of advertising investments, in-store merchandising as well as programming and innovation. Further, the company is undertaking buyouts to augment portfolio strength and boost revenues. Buyouts and divestitures had a net favorable impact of 0.8 point on the top line in the second quarter, thanks to the acquisition of ONE Brands (concluded in September 2019). Other prior acquisitions yielding favorably include Pirate Brands (Sep 2018) and Amplify Snack Brands (Jan 2018) to name a few.
Additionally, the company is undertaking strategic pricing initiatives. Notably, price realization benefited Hershey’s top line by 3.5 points in the second quarter of 2020. During the quarter, Hershey’s bottom line was driven by robust cost management, which helped counter COVID-19-related cost pressures. Adjusted operating margin expanded 170 basis points to 22.6%, courtesy of solid operational and corporate cost management that countered high COVID-19-related costs. Further, management anticipates margin expansion in the second half of 2020 to be backed by pricing and cost management.
Hershey’s volumes were affected by COVID-19-related hurdles in the company’s International and Other segment to a great extent during the second quarter. Net sales in the International and Other segment slumped 38% to $123.5 million. Volumes hit sales by 31.3 points, mainly due to the coronavirus impact on consumers’ economic security and flexibility, and retail operations. Closure of Hershey’s owned retail locations in the quarter, together with major air travel declines, also marred results in this division. While sales trends are likely to improve going forward, the second half sales are expected to lag the year-ago period’s figure by double digits.
Nevertheless, we believe that strength in the North American segment along with Hershey’s robust brands, cost containment and pricing strategies are likely to keep it going.
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