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Diversification Buoys Hershey's Year-End Results

By Asit Sharma – Updated Apr 25, 2019 at 3:08PM

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The confectioner's final three months of 2018 provided proof that sweet and salty snacks are often an appetizing combination.

Candy conglomerate The Hershey Company (HSY) wrapped up 2018 with moderate sales growth, as revealed in its fourth-quarter 2018 earnings report released on Thursday before the markets opened. Alongside earnings, the chocolate maker also issued its outlook for 2019, which calls for a slightly slower rate of revenue expansion versus the prior year.

Below, let's walk through big-picture numbers and then zero in on the quarter's details, which provide some context for this year's earnings outlook. Note that all comparative numbers in this article are presented against the prior-year quarter (the fourth quarter of 2017).

Chocolate pieces stacked on each other.

Image source: Getty Images.

Hershey: The raw numbers

Metric Q4 2018 Q4 2017 Growth (YOY)
Revenue $1.99 billion $1.94 billion 2.1%
Net income  $336.8 million $181.1 million 86%
Diluted earnings per share $1.60 $0.85 88.2%

Data source: The Hershey Company. YOY = year over year.

What happened this quarter?

  • The company's revenue advance was comprised of a net positive effect from acquisitions and divestitures of 3% and a 0.9% positive impact from higher volume. This was offset by 0.8% of lower net price realization and 0.6% of foreign-currency effects. Without the boost from acquired revenue, total revenue would have declined by 0.5% during the quarter.
  • Hershey's North America segment improved revenue by 4.3%, to $1.75 billion. Acquired revenue provided a 4.8% boost, and higher volume supplied a benefit of 0.8%. These were reduced by 1.1% of lower net price realization and a foreign-currency impact of 0.2%.
  • Acquired revenue in North America resulted from the company's $1.6 billion purchase of Amplify Snack Brands in January 2018, as well as its October 2018 purchase of Pirate Brands from B&G Foods for $420 million in cash.
  • Hershey picked up several growing salty snack brands in this latest deal, including Pirate's Booty, Smart Puffs, and Original Tings. Despite a consumer shift toward healthier snacks, the salty-snack category remains one of the fastest-growing areas in the consumer packaged goods (CPG) industry.
  • In Hershey's much smaller international and other segment, revenue declined by 8.9%, to $241.4 million, mostly due to the company's July 2018 divestiture of its Shanghai Golden Monkey candy business in China.
  • The company's adjusted gross margin, which removes the effects of unrealized derivative gains and losses, slipped 0.2 percentage points, to 42.5%, while adjusted operating margin improved 1.8 percentage points, to 18.6%, as cost-cutting and a tighter control over marketing spends in North America helped reduce expenses.
  • The wide differential in earnings between the final quarters of 2017 and 2018 can be traced primarily to changes in unrealized derivative gains between the two years, as well as tax rate changes via the U.S. corporate tax legislation of 2017. Adjusting for these and other items affecting comparability, net income in the fourth quarter of 2018 rose roughly 23% against the fourth quarter of 2017, to $265.2 million.

What management had to say

During Hershey's earnings conference call, CEO Michelle Buck observed that during 2018, the company proactively allocated resources to rejuvenating core brands while purchasing snack-based growth through bolt-on acquisitions:

In a dynamic and highly competitive operating environment, in 2018, we grew our business and delivered on our financial commitment, while strategically investing for the future. In our U.S. core confection business, we invested in new brand positioning and launched new campaigns for our two largest brands, Reese's and Hershey's. ... We also expanded our portfolio to capture incremental consumer occasions with complementary acquisitions of Amplify and Pirate's brands. These two high-growth, high-margin, better-for-use snacking asset are a great fit with our Hershey portfolio. They're performing well in the marketplace and they're on track to deliver against our goals.

Looking forward

Hershey's full-year 2019 outlook calls for 1%-3% revenue growth, which will trail its 3.7% revenue advance booked in 2018. This is due to several factors. First, the company will lap both of its snacking acquisitions during the 2019 year, effectively losing the comparative benefit of the new revenue.

In addition, Hersheys is in the process of implementing price increases during 2019 that will have an aggregate positive effect of 2.5%. However, this may result in temporarily lower volume in some of the company's brands, consequently dampening revenue.  

Finally, the organization continues to implement a stock-keeping unit (SKU) rationalization program that it started last spring. This involves culling lower performing product variants in favor of better selling, higher-margin items within each brand family. Similar to the price-increase initiative, the long-term effect should be positive on gross margin, yet the exercise might result in lower volumes at the outset.

Hershey will have to exceed the high end of its revenue guidance by nearly 1 percentage point to expand at a faster rate this year than in 2018. As the company invests for future growth, shareholders shouldn't expect the bottom line to outpace revenue: Earnings are anticipated to be similarly muted in 2019. The company expects diluted earnings per share (EPS) of between $5.50 and $5.66, which, at the midpoint, will exactly match the $5.58 of diluted EPS Hershey's earned in 2018.

Check out the latest The Hershey Company earnings call transcript.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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