The Hershey Company (HSY Quick QuoteHSY - Free Report) looks poised even amid an escalated cost environment. Incidentally, the company has been seeing high selling, marketing and administrative expenses for a while. Also, supply-chain inflation and increased costs to cater to the elevated demand may dent margins. That said, the company has been undertaking robust pricing actions, which, along with its prudent acquisitions and solid innovation, have been acting as upsides.

On its last earnings call, 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. 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. Earlier, management projected the adjusted EPS to increase 9-11%.

Pricing Efforts, Brand Strength

Hershey has been undertaking strategic pricing initiatives to improve its performance. The 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, the price realization contributed 6.8 points to growth. In the North America Salty Snacks segment, the price realization contributed 13.2 points to the upside. Across the International segment, the price realization contributed 5.8 points to sales. Management expects pricing to remain strong in the remainder of the year.

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%. Hershey expanded its presence in better-for-you (“BFY”) confection and gummy sweets. In addition, it is committed to supporting brands through solid media marketing.

Hershey has also 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 Hershey’s snacking and production capabilities. On Jun 25, 2021, Hershey concluded the acquisition of Lily's, a leading BFY confectionery brand. The buyout is in tandem with Hershey’s focus on creating an impressive BFY confection portfolio as part of its multi-pronged BFY snacking strategy. In the first quarter of 2022, sales from the Pretzels, Dot’s and Lily’s buyouts led to a 4.6-point benefit to HSY’s top line.

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Cost & Margin Concerns

In the first quarter of 2022, Hershey’s adjusted gross margin remained flat year over year at 45.8%. Gains from the net price realization, a timing benefit associated with the inventory valuation method and fixed-cost leverage were offset by broad-based supply-chain inflation, higher labor investments and increased costs to service the more-than-anticipated demand.  A negative mix due to the recent buyouts and the accelerated growth of the North America Salty Snacks unit also countered gains.

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.

Hershey has been grappling with higher selling, marketing and administrative expenses for a while. 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.

All said, we expect the abovementioned upsides to keep working well for this manufacturer and seller of confectionery products and pantry items. Shares of this Zacks Rank #3 (Hold) company have dipped 1.8% in the past three months compared with the industry’s decline of 2.5%.

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Some better-ranked stocks are Sysco Corporation (SYY Quick QuoteSYY - Free Report) , The Chef's Warehouse (CHEF Quick QuoteCHEF - Free Report) and Campbell Soup (CPB Quick QuoteCPB - Free Report) .

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The Zacks Consensus Estimate for CHEF’s current financial-year EPS suggests significant growth from the year-ago reported number.

Sysco, which engages in marketing and distributing various food and related products, carries a Zacks Rank #2 (Buy). 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.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2. Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.5% from the year-ago reported figure.