Hershey (NYSE:HSY) is still synonymous with chocolate, but its growing diversification with snack foods may one day change the character of the company and drive sales growth further as consumer snacking preferences change.
In the meantime, its core confection business still determines results, and Hershey's third-quarter earnings report, due out on Thursday, Oct. 24, should bear the marks of changes the candy company has made. Let's take a look at what investors can expect.
Hershey was caught flat-footed by the consumer shift toward healthier snacks and last year acquired Amplify Brands to buy into this new direction. The maker of Skinny Pop popcorn saw sales gains of 10% in the second quarter, which resulted in market share gains of more than 100 basis points.
The acquisition of Pirate Brands later in 2018 didn't go quite as smoothly. Sales for the maker of baked, trans-fat-free, and gluten-free snacks lost several retail distribution points during the acquisition that caused sales to fall. However, president and CEO Michele Buck assured analysts that those retailers were regained, and the snafu should be resolved going forward. It will be important to see whether the early-third-quarter sales trends continue across the period, as they had indicated a reversal in the sales drop.
Buck says Hershey remains in the market for more acquisitions in the healthy-snack space. It will eventually represent more of the confectioner's total revenue and might also influence how consumers come to view the company.
Thinking more strategically about pricing
Of more immediate import, though, are the price hikes Hershey has initiated. Although it's not alone in raising prices on its chocolate, candy, and gum -- Mars, which makes M&M's and Snickers, raised prices recently, as did global snack giant Mondelez International -- Buck told analysts the price hikes Hershey is implementing this year aren't necessarily related to commodity pricing as they have been in the past.
"Price realization is a strategic focus area for us," Buck said. "The price increase we announced last summer remains on track and the final portion is implementing now as we execute our Halloween program."
This could have an impact for several reasons:
- There is typically about a year delay before the effects of a price hike show up in financial results, because retailers need time to adjust to the new, higher pricing, and Hershey often supports the increases with promotions to ease consumers into the elevated price levels.
- Last year's 2.5% increase in bagged candy, gum, and mints is rolling through now, but sales have been weak, meaning they could get weaker.
- Hershey is breaking the $2 price threshold on its king-size chocolate bar, an important profit-making item, that will likely cause sales to drop down to smaller bars even though Hershey is supporting it with incentives and advertising.
- Halloween candy is a huge component of Hershey's annual sales for the year, and seasonal sales -- Easter and Halloween are the biggest -- count more toward full-year totals than do everyday sales. But this year's price hikes probably will make a bigger impact next year.
How will price increases be received?
Hershey has several puts and takes affecting third-quarter earnings, but the biggest question is how consumers will react to price hikes. Analysts are looking for sales to grow 2% this quarter, generating a near 4% increase in earnings, but there still might be resistance to the ever-rising prices on confections, no matter how strategic they are, particularly in light of the trend toward healthier snacking.
Hershey's stock has jumped 41% this year as sales have grown, but trading at more than 4 times its sales means it's a pricey stock and could pull back, perhaps sharply, if sales get stuck instead of rise as expected.