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Hershey (HSY) Benefits From Pricing, Buyouts & Hurt by Costs

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The Hershey Company (HSY - Free Report) is benefiting from its strong pricing power and contributions from prudent acquisitions. These upsides, together with the company’s brand strength drove its first-quarter 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and increased year over year.

That said, Hershey has been battling higher selling, marketing and administrative expenses for a while. Also, supply-chain inflation, higher labor investments and increased costs to service the more-than-anticipated demand pose threats to margins. However, management raised the net sales and earnings per share (EPS) view for 2022, given strength in the first-quarter performance along with robust expectations for the rest of the year, despite an inflationary environment.

Management now envisions net sales growth in the band of 10-12% for 2022. Earlier, net sales were expected to grow 8-10%. Hershey now expects the adjusted EPS to increase 10-12% for 2022, while the reported EPS growth is likely to be in the 8-11% band. Earlier, management projected the adjusted EPS to increase 9-11%, while the reported EPS growth was likely to be in the 7-10% band.

Factors Driving Hershey

Hershey has been undertaking strategic pricing initiatives to improve its performance. Net price realization drove HSY’s first-quarter 2022 top line by 6.9 points due to higher list prices across segments. In the North America Confectionery, price realization contributed 6.8 points to growth. In the North America Salty Snacks segment, price realization contributed 13.2 points to the upside. Across the International segment, price realization contributed 5.8 points to sales. Management expects pricing to remain strong in the remainder of the year.

Hershey has been undertaking buyouts to augment portfolio strength and boost revenues. 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 is a perfect match for Hershey’s growing salty snacking portfolio. The company also purchased Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition further expands HSY’s snacking and production capabilities. On Jun 25, 2021, Hershey concluded the acquisition of Lily's, a leading better-for-you confectionery brand. In the first quarter of 2022, sales from the Pretzels, Dot’s and Lily’s buyouts led to a 4.6-point benefit to the company’s top line.

Hershey regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio. In the first quarter of 2022, SkinnyPop witnessed impressive retail sales growth of more than 13%, while Pirate’s Booty retail sales rose 55%.

In the first quarter, adjusted earnings of $2.53 surged 31.8% year over year and beat the Zacks Consensus Estimate of $2.10. Consolidated net sales of $2,666.2 million rose 16.1% from the year-ago quarter’s level and beat the Zacks Consensus Estimate of $2,474.1 million. Organic net sales on a constant-currency basis jumped 11.5%. Higher prices, improved volumes and contributions from buyouts drove the quarterly performance. Solid consumer demand due to sustained at-home consumption amid an inflationary landscape was a driver. The company witnessed growth across all its segments.

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Key Headwinds

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

In the first quarter, the gross margin was affected by broad-based supply-chain inflation, higher labor investments and increased costs to service more-than-anticipated demand.  A negative mix due to the recent buyouts and the accelerated growth of the North America Salty Snacks unit also impacted performance. Although Hershey raised its bottom-line view for 2022, it expects supply-chain inflation and increased costs to cater to more demand to persist. The Russia-Ukraine war has added further complications to the commodity cost and supply-availability structure. Hershey expects increased inflation in 2022 due to escalated raw material, packaging and logistic expenses stemming from a tough geopolitical landscape. Management expects the gross margin to contract 120 to 140 basis points in full-year 2022.

Shares of this Zacks Rank #3 (Hold) company have rallied 8.6% in the past six months compared with the industry’s rise of 87.3%.

3 Solid Staple Stocks

Some better-ranked stocks are Pilgrim’s Pride (PPC - Free Report) , Sysco Corporation (SYY - Free Report) and Medifast (MED - Free Report) .

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

The Zacks Consensus Estimate for PPC’s current financial-year EPS suggests growth of almost 43% from the year-ago reported number.

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1. Sysco has a trailing four-quarter earnings surprise of 9.1%, on average.

The Zacks Consensus Estimate for SYY’s current financial-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

Medifast, which manufactures and distributes weight loss, weight management, healthy living products and other consumable health and nutritional products, currently carries a Zacks Rank #2 (Buy). Medifast has a trailing four-quarter earnings surprise of 12.9%, on average.

The Zacks Consensus Estimate for MED’s current financial-year sales and EPS suggests growth of almost 19% and 13.4%, respectively, from the year-ago reported figure.