Candy specialist Hershey (NYSE:HSY) is due to report its fiscal fourth-quarter earnings results before the stock market opens on Thursday, Jan. 31. Investors aren't settled about the outlook for this business, given that shares underperformed the S&P 500 by a wide margin for most of 2018 but raced higher in the year's final months.
Let's look at the metrics that will determine whether optimism is in order as Hershey ends the fiscal year and looks out to a potentially difficult selling environment in 2019.
Modest sales growth
Sales growth is the foundation for Hershey's long-term success, and the general weakness there helps explain why the stock fell for most of 2018. Management lowered its revenue outlook in late April, while citing cost pressures and an overly complex product offering.
While it will take more time to clean up its portfolio, there have already been a few encouraging signs of demand improvement. The organic sales metric, which strips out the impact from candy brand acquisitions and foreign currency swings, accelerated to a slightly positive result last quarter after having declined in the prior quarter.
We'll find out on Thursday if that encouraging momentum carried through to the fourth quarter. Most investors who follow the stock are expecting sales to rise by about 4% for the quarter and the broader year. On an organic basis, growth should land closer to 1%, according to management's latest forecast.
Getting more profitable
After climbing at a robust pace in the prior year, Hershey's profitability results have been more mixed lately. Gross profit margin is down to 45% of sales through the year's first nine months, versus 47% in the prior-year period. Executives weren't surprised by the decline, and it was driven mainly by higher supply-chain expenses rather than a need for price cuts. Still, investors are hoping for a rebound here, especially as its recent acquisition of the premium Pirate Brands franchise starts impacting the business. Management said in a conference call in late October that there should be a modest boost in this metric for the fourth quarter.
Meanwhile, look for continued modest progress in Hershey's cost-cutting that has allowed operating margin to expand over the last three quarters despite the sluggish sales pace.
Hershey began rolling out higher prices across much of its portfolio in early January, and the early impact on sales from that move will likely inform management's outlook for the broader year. If its recent growth initiatives worked, then the company should project a slight acceleration from the flat sales result that's expected for 2018. The profit outlook should be even brighter, in that case.
On the other hand, a sluggish holiday season or weak consumer acceptance of new candy introductions like the Hershey Reese's Pieces mashup bar might convince CEO Michele Buck and her executive team to take a more cautious outlook for 2019 that pairs modest profit growth with another roughly flat sales year.
Investors appear to be betting on the more optimistic scenario in sending the stock higher by almost 20% in the six months leading up to this earnings release. The flip side of that optimism is that it raises the bar for the company to show solid growth next week. Now it's up to Hershey to deliver on those expectations.