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Hershey Rides on Acquisitions, Innovations and Cost Savings

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The Hershey Company (HSY - Free Report) is benefiting from well-planned buyouts that have been strengthening its portfolio. The company plans to continue fortifying its acquired businesses and add new products through innovations. It is also focused on making productivity improvements and cost-saving initiatives, which are likely to drive growth. Further, Hershey concentrates on increasing savings through SKU rationalization and the Margin for Growth program.

In the past six months, shares of this Zacks Rank #3 (Hold) company have increased roughly 12.5%, outperforming its industry’s 8.3% growth. Meanwhile, the S&P 500 index declined 11.3% in the same period.



Let’s Introspect.

Buyouts: A Key Catalyst

Hershey has been banking on buyouts to augment its portfolio as well as boost revenue growth. In the third quarter of 2018, net impact from buyouts and divestitures provided a boost to the top line by 2.5 points. Notably, Hershey’s revenues improved 3.7 points and 5.9 points, respectively, during the third and the second quarter of 2018. This upside was primarily driven by the acquisition of Amplify Snack Brands. To go beyond chocolate and gain a solid footing in the fast-growing market for healthy snacks, Hershey acquired Amplify in January 2018.

With several plans rolled up its sleeves to further strengthen the Amplify brands, Hershey expects greater yields from this buyout in the forthcoming periods.

Also, in September 2018, the company acquired Pirate Brands, which marks its second high-growth and high-margin buyout that is aimed at augmenting the snacking business. Net benefits from buyouts and divestitures are expected to be 3.5 points in 2018. Clearly, such well-chalked buyouts are likely to continue supporting Hershey’s performance.

Brand Portfolio & Innovations

Hershey is the largest producer of quality chocolate products in the United States. Its popular brands includes Hershey’s, Reese’s, Kisses, Jolly Rancher, Brookside, Sofit and Ice Breakers. These brands 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.

Also, Hershey's Gold and Reese's Outrageous, which were launched in 2018, have proved conducive to the company. It is excited regarding the launch of Reese's Thins in March 2019 as well. An important strategy of the company is to create a unique and holistic portfolio for every season, which can meet consumers’ seasonal shopping needs.

Cost Savings: On Track

Hershey is on track with its Margin for Growth multi-year program. Per this initiative, Hershey will reduce its global workforce outside the United States by 15%. This is also intended toward improving overall operating margin through supply-chain optimization, a streamlined operating model and reduced administrative expenses with savings primarily being achieved in 2018 and 2019.

These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization. Management expects to reap savings of approximately $150-$175 million from this program. Hershey has also undertaken strategic pricing initiatives to improve mix, which are likely to bolster its performance in 2019.

However, high freight and logistics costs as well as additional investments in trade and packaging is denting margins. This, combined with stiff competition and consumers’ changing preferences are worrisome.

Nevertheless, we expect the aforementioned drivers to offset minor hurdles and help Hershey continue with its growth story.

3 Stocks to Watch
 
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Lamb Weston Holdings, Inc. (LW - Free Report) has a long-term earnings growth rate of 11.8% and a Zacks Rank #2.

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