The Hershey Company (HSY): Leveraging Seasonal Demand with Ramped Up Innovation & Continued Investments

Hershey’s Q2 2024 results reflected mixed dynamics with headwinds. Revenue of $2.07B missed expectations by $246M, down 16.7% YoY and 36.2% sequentially, driven by an 8-9% impact from lower retail inventory levels and Halloween timing shifts. Net price realization improved 6-7% through targeted pricing actions, but elevated cocoa costs continued to pressure gross margins despite some temporary relief from favorable hedging impacts. Adjusted EPS of $1.27 missed by $0.18, down 36.8% YoY and 58.6% QoQ, while GAAP EPS fell sharply to $0.89, missing by $0.43 and down 55.1% YoY. Operating income was compressed by a softer sales environment and inflationary pressures. Despite the setbacks, Hershey reaffirmed its full-year guidance, banking on a stronger H2 supported by seasonal demand, new innovations, and enhanced marketing investments. The adjusted incentive compensation aligns with this moderated outlook, reflecting cautious optimism amid ongoing market challenges. The North American Confectionery segment, the largest revenue driver, saw a 6% sales decline driven by lower retail inventory levels and Halloween sales timing. Management remains optimistic, indicating this was a timing issue rather than a dip in consumer demand. In contrast, the Salty Snacks segment showed strong performance, with Dot’s Pretzels benefiting from distribution gains and innovation in flavors such as Parmesan Garlic. SkinnyPop also began to recover, supported by strategic marketing initiatives and targeted product innovation. International sales faced headwinds from subdued consumer spending and market-specific challenges, but management anticipates improvement in the second half due to favorable year-over-year comparisons. The emphasis remains on optimizing product mix and leveraging brand strength to navigate near-term pressures while positioning for a more robust back half, underscoring the company's strategic agility and focus on execution amid volatile market conditions. Hershey remains focused on expanding its core chocolate and sweets business while strategically enhancing its salty snacks portfolio through targeted innovation, including new product launches like Shaq-A-Licious, addressing consumer demand and driving category growth. Pricing continues to play a pivotal role amid elevated cocoa and input costs, with a disciplined approach to price increases aimed at preserving consumer value perception. The company is executing on its digital transformation and supply chain optimization strategy, which targets $700 million in gross savings by 2026, highlighted by the recent S/4 ERP implementation that will enhance efficiency and workforce planning. Hershey is also adapting to evolving consumer behaviors, including a shift towards value channels like dollar stores, impacting sales in traditional convenience outlets. Despite ongoing cost pressures, Hershey’s supply chain and productivity initiatives are positioned to mitigate some inflationary effects, reinforcing its focus to operational discipline and strategic execution. Hershey faces persistent cost headwinds, with cocoa and sugar prices remaining elevated and expected to continue pressuring gross margins. Input cost inflation is forecast to drive a 200 bps contraction in gross margins in FY2024, offset only partially by strategic pricing actions, expected to deliver 6-7 points of net price realization. Discretionary spending softness, particularly in convenience channels, coupled with reduced promotional activity, is constraining market share in the core chocolate segment. However, strong seasonal demand for Halloween and Christmas is likely to provide upside in H2 2024, alongside new product launches, such as Reese’s Caramel and Shaq-branded sweets, which aim to reinvigorate consumer engagement and drive category leadership. Management is targeting mid-single-digit net sales growth for FY2024, supported by innovation and improved promotional dynamics, particularly as the company laps softer year-ago comparisons. However, Hershey has cautioned that channel restocking will not contribute meaningfully to this growth, placing more emphasis on underlying consumer demand. Capital expenditures are set to exceed 5% of sales for the fifth consecutive year, aimed at bolstering supply chain capabilities and digital infrastructure, underscoring management's long-term investment approach despite near-term macroeconomic uncertainties. Innovation remains a critical growth lever, with Hershey committing 7% of sales (~$900M annually) to R&D and marketing as it aims to fortify its brand presence in evolving consumer categories, such as sugar-free and indulgent snacking. The CEO has sharpened the company’s focus on its domestic business, scaling back international exposure, which remains under competitive pressure from global peers. Despite the tailwinds from seasonal demand and innovation, persistent inflationary pressures and shifts in consumer behavior toward lower-priced alternatives pose ongoing risks. The full-year guidance reaffirms management’s confidence in operational execution and pricing power, but the broader economic environment warrants caution. Initiation of Coverage :Earnings Review F2Q24, Forecasts,DCF, Valuation, Peer Analysis, ESG & Risks