Hershey's Portfolio Strength Drives Growth Amid Cost Woes

The Hershey Company (NYSE:HSY) has been benefitting from its impressive brand portfolio, which can be attributable to the company’s focus on innovation and buyouts. These factors help Hershey make the most of the solid demand for chocolate. Also, the company’s saving and productivity initiatives provide it some cushion against hurdles like elevated costs.

Buoyed by these upsides, the company has gained 6.3% in the past six months compared with the industry’s growth of 5.7%. Let’s see if the aforementioned endeavors can fuel further growth for this Zacks Rank #3 (Hold) stock.

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

Buyouts & Innovation Bolster Portfolio

Hershey has been undertaking buyouts to augment portfolio strength and boost revenues. In fact, net impact from buyouts and divestitures boosted sales growth by 3 points during the fourth quarter of 2018. Notably, Hershey’s top line is steadily gaining from the acquisition of Amplify Snack Brands. Hershey acquired Amplify in January 2018 in a bid to go beyond chocolate and gain a solid footing in the fast-growing market for healthy snacks. Encouragingly, Hershey expects greater yields from this buyout in the forthcoming periods. Also Hershey acquired Pirate Brands from B&G Foods (NYSE:BGS) last September, which marks its second high-growth and high-margin buyout aimed at augmenting the snacking business. Notably, the buyouts of Amplify and Pirate Brands boosted sales in the North American unit by almost 4.8 points during the fourth quarter. Going ahead, management expects such well-chalked buyouts to boost performance.

Hershey’s core brands, including Hershey’s, Reese’s, Hershey’s Kisses and Jolly Rancher, among others, 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 respect, Hershey's Gold and Reese's Outrageous, which were launched in 2018, have been doing 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.

Can Saving & Productivity Efforts Offset Hurdles?

During the fourth quarter of 2018, Hershey’s adjusted gross margin shrunk 20 basis points (bps) due to escalated freight and logistics expenses, and greater trade and packaging investments. Prior to this, in the third quarter, gross margin fell 130 bps, while it declined 260 bps each during the second and first quarters of 2018, respectively. Persistence of such pressures is a threat to the company’s profitability. In fact, many other food companies like Conagra Brands (NYSE:CAG) and TreeHouse Foods (NYSE:THS) , among others, are grappling with cost-related hurdles.

Coming back to Hershey, the company nonetheless focuses on optimizing its portfolio to deliver increased profitability. In this respect, the company’s SKU rationalizing efforts have been progressing well. In addition, the company is well on track with its Margin for Growth multi-year program. Per this multi-year 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. These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization. Management expects overall savings of approximately $150-$175 million from the Margin for Growth initiative.

Apart from this, Hershey is on track to improve its presence in core markets like China, India, Brazil and Mexico where consumer spending growth is positive. Such efforts should help Hershey counter the obstacles and drive growth.

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