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Hershey's (HSY) North America Unit Solid, International Weak

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The Hershey Company (HSY - Free Report) appears well placed on the back of its robust brand-building efforts and efficient pricing strategy. The company’s North America segment has been performing well in particular, though its International segment has been sluggish for a while now. Also, costs associated with the pandemic are a concern. Nonetheless, Hershey’s robust cost-management efforts have been aiding its margins.

Let’s delve deeper.

Solid North America Unit & View

Hershey has been benefiting from strength in the North America segment, which remained sturdy in third-quarter 2020. During the quarter, the top and bottom lines increased year over year and came ahead of the Zacks Consensus Estimate. Results benefited from solid cost management and strong performance in the North America segment, which gained from improved volumes and pricing. Also, gains from ONE Brands’ buyout drove Hershey’s top line in the quarter.

Notably, the company gained a confectionery market share of nearly 190 basis points (bps) in the United States. North America (the United States and Canada) net sales increased 6.3% year over year to $2,014.2 million. Markedly, price realization and the net impact of acquisitions and divestitures boosted the unit’s sales by 3.3 points and 0.9 points, respectively. Volumes contributed 2.2 points, driven by retailer inventory replenishment and strong consumer takeaway in everyday chocolate and baking products. Hershey expects net sales to rise nearly 1% for 2020. Further, the company envisions adjusted EPS for 2020 in the range of $6.18-$6.24. This view indicates a rise of 7-8% from the reported figure in 2019.

Key Growth Drivers

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, and programming and innovation. In fact, the company regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. In this respect, its Kit Kat Duos innovation and the expansion to the THiNS platform are noteworthy. Further, the company relaunched the Take5 brand under the Reese's banner. The launch of the Kisses brand in India is also reaping benefits.

Further, the company has been 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 third quarter, thanks to the acquisition of ONE Brands (concluded in September 2019). Further, the net impact of buyouts and divestitures is expected to make a 0.5-point positive impact on the top line in 2020. Apart from this, Hershey has been undertaking strategic pricing initiatives to improve its performance. Notably, price realization benefited Hershey’s top line by 2.9 points in the last reported quarter. Improved pricing along with robust cost management helped the company counter commodity and warehouse-related cost pressures in the third quarter and boost margins.

Weak International Unit

In third-quarter 2020, net sales in the International and Other segment fell 14.4% to $205.7 million. On a cc basis, net sales declined 9.3%. Volumes hit sales by 9.6 points, mainly due to lower sales in the company's owned retail locations. Although retail locations reopened during the quarter, footfall was low due to reduced consumer travel and capacity restrictions imposed by the government. Also, reduced air travel was a reason. Combined net sales in Mexico, Brazil, China and India dropped 13.9%. We note that management’s sales guidance for 2020 includes a 2-point pandemic-related headwind in the International & Other segment. Additionally, unfavorable currency fluctuations are expected to have a 0.5-point negative impact on overall sales growth in 2020.

Nevertheless, Hershey’s robust strategic endeavors and strength in the North America segment are likely to help it counter these headwinds and aid growth. Shares of this Zacks Rank #3 (Hold) company have gained 14.9% in the past six months compared with the industry’s growth of 14.8%.

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