Hershey Gains on Buyouts & Innovation, Cost Inflation a Worry

The Hershey Company HSY appears to be a preferred pick, given this renowned chocolate maker’s dedicated efforts to strengthen brand portfolio through innovation and buyouts. Further, the company is focused on making productivity improvements and cost-saving initiatives, which are likely to help it counter escalated cost woes.

Markedly, Hershey has rallied 17% in the past six months compared with the industry’s growth of 16%. Let’s delve deeper and see how this Zacks Rank #3 (Hold) stock is positioned.

Buyouts a Major Driver

Hershey has been conducting buyouts to augment portfolio strength and boost revenues. In fact, net impact from buyouts and divestitures boosted sales growth by 2.5 points during the third quarter of 2018. Notably, Hershey’s sales gained 3.7 points and 5.9 points during the third and the second quarters of 2018, respectively, from 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 Strength & Innovation

Hershey’s five 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, and programming and innovation. In fact, Hershey regularly brings innovation to its core brands to meet consumer demand and needs that are not addressed by its current portfolio.

In this regard, Hershey's Gold and Reese's Outrageous, which were launched in 2018, have been doing well. Further, the company is excited regarding the launch of Reese's Thins in March 2019. 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-Saving Initiatives to Help Counter Hurdles

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 to improve 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. Additionally, the company has undertaken strategic pricing initiatives to improve mix, which are likely to benefit performance in 2019.

These efforts along with the aforementioned upsides should help Hershey tide over cost-related headwinds. Incidentally, during the third quarter of 2018, adjusted gross margin shrunk 130 basis points (bps) due to escalated freight and logistics expenses along with greater trade and packaging investments.

Prior to this, in the second and first quarters of 2018, adjusted gross margin declined 260 bps each. Persistence of such pressures is a threat to the company’s profitability. Also, the company has low international presence in comparison to various other players. Nevertheless, Hershey is accelerating its business in key markets like China, India, Brazil and Mexico where consumer spending growth is positive.

All said, we expect these drivers to help Hershey continue with its growth story.

Don’t Miss These Solid Food Stocks

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