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Hershey Has a Lot to Prove This Week When It Reports Earnings

By Demitri Kalogeropoulos – Apr 23, 2019 at 7:45AM

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The chocolate snack giant is aiming for stronger profit growth in 2019.

Investors are feeling confident heading into Hershey's (HSY 0.69%) first-quarter earnings results, set for Thursday, April 25. That's because the chocolate confectioner had mostly positive things to say about the business at the close of 2018. Recent acquisitions are improving its growth prospects, and the combination of price increases and cost cuts could speed profit gains starting as early as 2020.

But the 2019 fiscal year will determine whether those rebound hopes were practical or just wishful thinking. With that in mind, let's look at the important trends for investors to follow in this upcoming earnings announcement that kicks off that pivotal year.

Chocolate and hazelnuts on display.

Image source: Getty Images.

Building a bigger portfolio

Hershey managed significant sales growth in 2018, particularly in the second half of the year. However, under the surface, there were signs of weakness in its expansion pace. After stripping out the impact of acquired businesses, revenue would have inched lower in the most recent quarter. Hershey got all of its 3% boost from higher sales volume, too, as average prices slipped in the period.

Still, the company notched a few encouraging wins in the holiday selling period. Its Hot Cocoa Kisses treat was a hit and helped lift the broader Kisses franchise in December. Hershey finished the year with six of the industry's top 10-selling brands. And while its overall market share dipped slightly, it held the overall No. 1 spot.

Given those mixed results, it's no surprise that management is calling for organic sales to rise by between 1% and 3% this year to mark a slowdown from last year's 3.7% increase. But investors shouldn't read too much into that shift, since Hershey is busy trimming underperforming products from the portfolio in a process that will pressure top-line results. Those moves hurt sales last quarter, and CEO Michele Buck said executives "expect these headwinds to persist in 2019 as we focus on initiatives to drive growth within our chocolate portfolio and continue to reduce complexity to improve margins."

Raising prices and margins

Speaking of margins, Hershey is hoping that its portfolio changes, including the addition of the Amplify and Pirate Brands franchises, will lift that important metric in 2019. Profitability should also be supported by a 2.5% price increase, as well as cost cuts. Investors saw the first hints of progress on this score in the fourth quarter, when adjusted gross profit margin fell at a slower rate than in previous quarters, dropping by just 0.2 percentage points to 42.5% of sales. Executives say they're targeting a modest expansion for 2019, but it will be interesting to see how consumers react to the price changes.

Combine that increase with cost cuts, and you have the potential for outsized profit gains, with operating margin improving in 2019 following last year's spike to 21% of sales from 18%. Hershey's bottom line forecast calls for earnings to rise by between 5% and 7% to significantly outpace sales gains.

Investors won't have a clear idea of whether these targets are achievable until the second half of the 2019 year. Still, Hershey's latest operating trends should indicate whether the modest growth rebound shareholders saw in late 2018 has continued and whether management's diversification and portfolio-cleansing plans are building a stronger foundation for steadily rising profits.

Demitrios Kalogeropoulos 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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