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Hershey (HSY) Benefits From Prudent Buyouts, Hurt by Costs

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The Hershey Company (HSY - Free Report) is undertaking buyouts to augment portfolio strength as well as boost revenues. The company’s focus on innovation and pricing efforts look promising. However, high costs are a roadblock for Hershey.

Let’s delve deeper.

What’s Working for Hershey?

Hershey has strategically increased its presence through acquisitions to expand its portfolio. On Jun 25, 2021, the company concluded the acquisition of Lily's Sweets, LLC (Lily's) — a leading better-for-you (“BFY”) confectionary brand. The buyout is in sync with its focus on creating an impressive BFY confection portfolio as part of its multi-pronged better-for-you snacking strategy.

The company acquired ONE Brands, LLC in September 2019 to solidify its footing in the snacking category. Hershey acquired the Pirate Brands in October 2018 to bolster its snacking business. Additionally, the company is gaining from the Amplify Snack Brands, which was acquired in January 2018, to expand in the snacking category. During its second-quarter 2021 earnings call, management highlighted that its Pirate’s Booty and ONE nutrition bar brands increased significantly.

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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. The company regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. In its last earnings call, management highlighted that its Reese’s innovation including the Reese’s Pretzel and limited edition Peanut Butter Lovers products are driving growth. Moreover, Hershey is committed toward supporting its brands through solid media marketing.

Hershey has been undertaking strategic pricing initiatives to improve its performance. Net price realization benefited Hershey’s top line by 1.0 points in the second quarter. In the International and Other segment, price realization contributed 15 point benefits to net sales.

Cost Hurdles

Hershey has been grappling with higher selling, marketing and administrative expenses for a while. During second-quarter 2021, the metric increased 14.3% year over year mainly due to higher corporate expenses. Advertising and related consumer marketing expenses increased 9.9% thanks to reactivation of important sponsorships in the North America segment. Also, higher investment in core brands in the International & Other unit caused the downside. Management, in its last earnings call, highlighted that it expects to see increased packaging and freight costs as well as escalated labor expenses in the second half of the year.

All said, let’s see if the aforementioned upsides can help the company stay afloat amid such hurdles. The Zacks Rank #3 (Hold) company’s stock has increased 17.7% in the past year compared with the industry’s 21.1% growth.

Better-Ranked Food Bets

Darling Ingredients Inc. (DAR - Free Report) , currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 39.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medifast, Inc. (MED - Free Report) , currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 16%, on average.

Sysco Corporation (SYY - Free Report) , currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 13.3%, on average.