Has Hershey's New Strategy Led to Improved Results?

Hershey (NYSE: HSY  ) has been a long-term winner for investors, but there have also been difficult stretches. These stretches lasted for several years on some occasions, and this can lead to investor frustration. While a similar trend is possible in the near future, it's not likely.

Prior to Hershey teaming up with The Cambridge Group, a division of Nielsen, the company's product innovations weren't meeting expectations. Then, when Mars and Wrigley merged in 2008, Hershey knew the competition would increase. To make matters worse, Kraft (NASDAQ: KRFT  ) acquired Cadbury in 2010. Kraft then spun off Kraft Foods and changed its name to Mondelez International (NASDAQ: MDLZ  ) , which is now one of Hershey's top rivals. Both companies are performing well, but one has been outperforming the other lately.

Let's take a look at what Hershey has done to improve its operations, and if its underlying business looks more impressive than that of Mondelez International at the moment.

Altered strategy
Before teaming up with The Cambridge Group, Nielsen says, Hershey would innovate relentlessly and then push the products it came up with onto retailers. For instance, Hershey offered a wide variety of Hershey's Kisses which had different fillings and packaging. It was a supply-chain-focused operation. There were no big hits from the company's product innovations, which led to increased inventory and higher supply chain costs. That strategy has changed significantly over the past few years, and it has worked.

Hershey's strategy change focused on consumer insights and targeting the most profitable consumers. Instead of Hershey choosing product innovations, the consumers would choose them without even realizing it. Consumer insights also began to drive marketing campaigns. Everything became centered around the consumer and the highest-demand opportunities.

According to Nielsen, Hershey's consumer insights are based on taste preferences, motivations, needs, and retailer shopping choices. Hershey also uses the "Who, What, Where, When, How" philosophy. Hershey found the most profitable consumer to be the one that likes to try new varieties of Hershey candies, which the company humorously dubbed "Engaged Exploring Munchers."

You might think this would lead to increased supply chain costs, as Hershey would have to pump out one product innovation after another, but that's not the case. Hershey has shied away from its underperforming brands and focused more on the most profitable brands and innovations while expanding its core brands, such as Hershey's, Reese's, Kit Kat, Twizzlers, and Ice Breakers. Hershey is now focusing on fewer products, but they're also more profitable products.

However, does all this mean that Hershey has had a stronger underlying operation than Mondelez International recently? If you're thinking of investing in the sweet-tooth consumer, then you're going to want best-of-breed.

Hershey vs. Mondelez International
Mondelez International is a larger company than Hershey, with a market cap of $61.80 billion versus Hershey's market cap of "just" $21.69 billion. However, bigger doesn't always mean better. Don't get the wrong idea, Mondelez has significant growth opportunities, but if you look at key trends for these two companies over the past year you will see that Hershey is a clear winner on both the top and bottom lines:

HSY Net Income (TTM) Chart

HSY Net Income (TTM) data by YCharts.

Furthermore, Hershey currently yields a 2% dividend, whereas Mondelez yields 1.60%. That said, thanks to its size, Mondelez has generated more operating cash flow over the past year, to the tune of $2.95 billion versus $1.11 billion for Hershey. Still, I'd rather go with the company showing stronger growth on both the top and bottom lines that also generates strong cash flow relative to its capitalization. 

The other bottom line
Hershey has figured out that we're now living in a demand-driven consumer environment. If a company doesn't offer consumers what they want and need, then the company will fail. Fortunately, Hershey is meeting consumer demands, and it's growing its top and bottom lines in a challenging consumer environment. To me, that's the sign of a winner. 

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  • Report this Comment On January 04, 2014, at 11:35 AM, BradReeseCom wrote:

    Hi Dan,

    The acquisition of Cadbury by Hershey was a done deal until Hershey CEO Dave West killed the deal:

    The acquisition of Cadbury by Hershey would have created untold billions in new wealth for Hershey shareholders.

    What exactly was Hershey CEO Dave West's reward for killing this once in a lifetime opportunity for Hershey to acquire Cadbury?

    Well, within a year of killing the once in a lifetime opportunity to acquire Cadbury, Hershey CEO Dave West was rewarded for killing the Cadbury deal by Kraft's financial adviser, Centerview, when he was appointed as the new CEO of Del Monte Foods, a Centerview Capital owned portfolio company:

    And who was the Centerview Senior Advisor to Kraft during Hershey's bid for Cadbury?

    Why none other than the long time mentor to Hershey CEO Dave West, former Hershey Chairman and CEO - Rick Lenny (Dave West was Rick Lenny's right-hand man when Lenny was Hershey's Chairman and CEO):

    The following October 25, 2007 private and confidential letter sent to Hershey's Board of Directors was written by the Chairman of Hershey's controlling shareholder, Roy Zimmerman:

    Zimmerman detailed the following eight horrendous operating results of Hershey while under the leadership of both Rick Lenny and his right-hand man, Dave West:

    1. "There has been in the past two years a 3.2 market share point shift vs. M&M/Mars (a combination of a loss of 1.3 share points by the Company and a gain of 1.9 share points by Mars)."

    2. "The Company's net sales (excluding acquisitions) are at their current levels principally through price increases and weight reductions. Mr. West indicated at the October 2nd joint meeting that the limit has been reached for further price increases, and, in fact, price reductions may be necessary."

    3. "The shift in focus from major core brands items to new products (including 'limited editions/in-and-out' items) has resulted in poundage or volume reduction in core brands, -20% in some cases. Getting major core brand volume back is a major challenge, in particular, given a re-invigorated Mars."

    4. "The Company dramatically cut advertising and other direct brand expenditures (in the tens of millions of dollars) in the 2003-2005 period, thus underinvesting in core brands, but allowing for the bottom line to grow.

    "As one analyst noted, the Company could be perceived as 'over-earning' during this period ('over-earning' not used in an accounting but performance sense)."

    5. "The Company has taken four restructurings since 2001, resulting in aggregate charges in excess of $1 billion and the loss of approximately 3,000 jobs (including the Supply Chain Transformation, but excluding jobs that will be created in Mexico).

    "Many of the job losses are related to the reduction in overall poundage as opposed to pure efficiency improvements. This reduction, by Company management's own admission, is in turn related to the unsustainability of the 'limited editions, in-and-out' marketing strategy. With a sustainable marketing strategy, job losses at this level may have been avoided."

    6. "Company management has acknowledged product quality and taste issues, indicating the plant managers let the guard-rails of quality get too far apart."

    7. "The Company has missed its earnings targets for the six quarters ending 2007 and given numerous earnings warnings during this period, including most recently last week."

    8. "All of this has occurred on the current Board's 'watch,' and the Trust is deeply concerned the Board regards this as a long track record of strong performance."

    Hershey's Board of Directors sent the following 2 insulting letters to Hershey's controlling shareholder, The Hershey Trust:

    October 22, 2007

    and October 31, 2007:

    The result?

    The Hershey Trust fired all (except for 1) of Hershey's Board of Directors:

    View the replaced Hershey directors:

    So here are the 2-heroes that Hershey shareholders need to personally thank for increasing their wealth:

    Roy Zimmerman and Jim Nevels

    Fortunately, I've had the opportunity to personally thank Hershey Chairman Jim Nevels face-to-face!

    And it's my opinion that Hershey Chairman Jim Nevels is totally responsible for Hershey's current ongoing success.


    Brad Reese

  • Report this Comment On January 08, 2014, at 1:04 PM, ChuckXX wrote:

    I love the companys products but the stock price is way over valued at this point in time. The forward PE for 2014 is ridiculous for a company that is growing its earnings 10% annually.

  • Report this Comment On January 15, 2014, at 12:42 PM, ScoopHoop wrote:

    The average P/E for Hershey over the past 10 years was 25.7. The trailing P/E is 28.6 and forward P/E is 22.1. So current valuation is really not that far out of line. Indeed, going forward, HSY is trading at a reasonable price. HSY is rapidly expanding its sales overseas and Asia with new factory being constructed in Malaysia, and the purchase of a candy company in Shanghai. HSY owns the North American chocolate market and is well positioned to grow sales internationally for the next five years. Few companies have a long run value proposition like HSY. I started buying this stock three years ago and recently added another 100 shares to my position at 98.50.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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