Last month, Fool contributor Brian Gorman pointed out that many beverage and confectionary businesses, like Cadbury Schweppes (NYSE: CSG), will continue to be challenged by surging sugar prices. While Hershey (NYSE: HSY) did witness some tightening on gross margins, the real story for the first quarter is the launch of new strategic initiatives to spur growth.
More is better, right? Not always. And in the case of product offerings, the quality of fewer often makes greater business sense than the mediocrity of many. Such is Hershey's thinking when it described its new growth initiatives. Over the next several quarters, the company intends to streamline its operations, focusing on its key products. CEO Richard Lenny asserted that it will be "reducing the absolute number of both existing and new products."
Beyond these reductions, Hershey will focus on four major product categories to drive growth: dark chocolate, refreshment, cookies, and single-serve snack nut. Of these, management indicated in the conference call that the premium category of dark chocolate is perhaps its most important push. As it is, in 2006, this is its fastest-growing segment, but management believes there's plenty of opportunity remaining. To capitalize on this market, look for Hershey to aggressively increase its distribution of extra dark chocolate.
Fueling the dark-chocolate frenzy are new scientific studies suggesting that extra dark chocolate -- chocolate with high cocoa content, often considered as being 70% or higher -- is packed with more antioxidant power than almost any other food, exceeding even that of blueberries, cranberries, and raspberries. It just seems too good to be true -- dark chocolate is not only tasty, but it has cardiovascular, anti-cancer, and anti-aging benefits, too. While these studies are still in the preliminary stages, it hasn't stopped consumers from buying the high-cocoa-content bars.
You can count me in as one who has bought into the story, as you'll often find me mixing 85% or 99% cocoa pieces with almonds and raisins. And it's buyers like me that Hershey is counting on to fuel growth in these core areas, compounding its market share presence, which is already solid as it gained in all major segments in the first quarter.
In addition to its growth efforts, the company has strong cost controls in place that became most evident when you consider that, despite weaker gross margins, Hershey more than made up for it in operating profitability. Gross margins slipped to 37.9%, from 38.2% in the comparable period a year ago. But despite taking on a business realignment charge of $3.3 million, the company's streamlined selling, marketing, and administrative expenses still managed to improve operating margins to 18.5% from 17.5% last year.
Sound growth initiative, streamlined operations, and strong cost controls all add up to an even sweeter Hershey and a worthy addition to any investor's watch list.
More Foolishness for your sweet tooth:
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
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