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Hershey Gains From Strong Brands & Efficiency Boosting Plans

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The Hershey Company HSY has been an attractive investment pick, courtesy of well-chalked measures to boost portfolio strength. The company has been strengthening its snacking business through acquisitions. Additionally, its pricing policies and efforts to enhance operating efficiency have been yielding. However, rising marketing expenses are a concern for the company. Let’s take a closer look.

Moves to Enhance Portfolio & Business Strength

Buyouts have played an important role in augmenting Hershey’s revenues. Evidently, net impact from buyouts and divestitures boosted sales growth by 1.2 points during the third quarter of 2019. The top line was primarily supported by the acquisition of Pirate Brands. Additionally, the company has been gaining from Amplify Snack Brands, which was acquired in January 2018, to expand in the snacking category.  

Markedly, the Amplify portfolio has been delivering mid to high single-digit growth. Also, the company acquired Pirate Brands from B&G Foods (BGS - Free Report) in September 2018, which is yielding results. Apart from this, the acquisition of barkTHINS has been aiding the company’s better-for-you snacks portfolio.  

Notably, Hershey’s buyouts and divestitures are expected to positively impact net sales by roughly 0.5 points in 2019. Other food companies like Smucker SJM and General Mills GIS are benefiting from strategic acquisitions.

Coming back to Hershey, we are optimistic about the company’s focus on innovation. In this respect, Hershey's Gold and Reese's Outrageous, launched in 2018, have been doing well. The Kisses brand’s launch in India is also reaping benefits. The company strives to create a unique and holistic portfolio for every season, which can address consumers’ seasonal shopping needs.

In addition to these, Hershey is progressing well with efforts to enhance operating efficiency. In this respect, the company’s SKU rationalizing efforts have been fruitful. It is also on track with the Margin for Growth multi-year program. This program is intended to improve operating margin through supply-chain optimization, streamlining operating model and reduction of administrative expenses. Additionally, the company has undertaken strategic pricing initiatives to improve mix. Management expects to continue to benefit from net price realization, which in turn is expected to support gross margin growth.

Courtesy of these upsides, the stock has gained 15.1% in the past six months compared with the industry’s rise of 11.5%.

Wrapping up

Hershey is grappling with higher advertising and marketing expenses. The metric increased 10.5% in the third quarter, due to higher advertising spending in North America. Excluding this, the company’s selling, marketing and administrative expenses increased 3.5% due to higher incentive compensation. Additionally, adverse impacts from currency fluctuations have been a hurdle for the company.
Nevertheless, we expect Hershey to tide over the aforementioned headwinds on the back of consistent efforts to bolster brands and business efficiency. That said, we expect this Zacks Rank #3 (hold) company to remain on growth trajectory and in investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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