Hershey on Track With Pricing Actions and Innovations

The Hershey Company HSY is reaping the benefits from robust consumer demand globally. The company continues to invest in its brands and capabilities to drive growth. Effective pricing actions have been working well for this global leader in chocolate and confectionery. Its investments in innovation, marketing and in-store execution have been beneficial, leading to better consumer engagement and enhanced market share performance.
Due to these upsides, Hershey kickstarted 2024 on a strong note, with first-quarter top and bottom lines increasing year over year and beating their respective Zacks Consensus Estimate. Impressively, management expects year-over-year net sales growth in the range of 2-3% for 2024.
Hershey, however, is not immune to rising costs, which are putting pressure on its margin performance. Let's discuss this in detail.

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What's Working in Hershey's Favor?

Hershey is undertaking strategic pricing initiatives to improve its performance. The trend continued in the first quarter of 2024, with price realization being up 5.2% year over year. In the North America Confectionery segment, organic pricing increased 5.9%. Organic pricing rose 1.7% in the North America Salty Snacks. In the International unit, the company's organic pricing jumped 3.5%. The continuation of such trends bodes well for Hershey.
The company is undertaking buyouts to augment portfolio strength and boost revenues. In December 2021, Hershey acquired Dot's Pretzels LLC, the owner of Dot's Homestyle Pretzels, a leading brand in the pretzel category. The addition of Dot's Pretzels is a perfect match for Hershey's growing salty snacking portfolio. Dot's Pretzels remained strong in the first quarter of 2024. HSY also purchased Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition further expanded its snacking and production capabilities.
Hershey markets some of the world's leading brands, which enjoy widespread consumer acceptance. The company is also a global leader in sugar confectionery products, an attractive category as confectionery products are readily available, affordable and highly indulgent, thus making the industry almost recession-resistant.
Hershey's 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. The company regularly brings innovation to its core brands to meet consumer demands and needs that are not addressed by its current portfolio. It has innovation, distribution and merchandising activations in the pipeline for 2024, courtesy of a significant rise in capacity.

Is All Rosy for Hershey?

Hershey is operating amid a volatile business environment. The company is not immune to rising costs, which are putting pressure on its margin performance. In the first quarter, the adjusted gross margin was 44.9%, down 170 basis points (bps) year over year due to increased commodity costs. For 2024, management expects the gross margin to decline approximately 200 bps due to high cocoa prices and elevated sugar costs.
Also, Hershey has been grappling with higher selling, marketing and administrative (SG&A) expenses for a while. In the first quarter, the company's SG&A expenses rose 6.3% on increased levels of media, capability and technology investments. Advertising and related consumer marketing expenses moved up 12%, with elevated investments across all segments.

Wrapping Up

Despite these challenges, Hershey is on track with the Advancing Agility & Automation initiative to generate net run-rate savings and fuel investments.  Focus on cost-saving efforts, along with the upsides mentioned above, are likely to fuel growth.
Shares of the Zacks Rank #3 (Hold) company have risen 2.1% in the past three months compared with the industry's 1% growth.

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