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What We Learned From Hershey’s Third-Quarter Earnings Call

By Demitri Kalogeropoulos – Nov 2, 2019 at 11:40AM

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The confectioner is on track to post sluggish sales growth in 2019.

Hershey (HSY -0.57%) investors were recently treated to another solid earnings report highlighted by sales gains and robust profit generation. The confectioner's third-quarter announcement kept it on track to meet management's outlook for the full year despite difficult selling conditions both in the U.S. and in key international markets.

CEO Michele Buck and her team said in a conference call with analysts that executives are happy with the results of their growth and profitability initiatives, but that they still see challenges as Hershey works toward speeding growth back up. Let's look at a few highlights from that presentation to investors.

A woman eats a chocolate bar.

Image source: Getty Images.

Two markets

We are pleased with our third-quarter results and the momentum we are seeing on our core business. Investments in our brands and capabilities as well as strong execution are driving solid confection sales and share gains in both our U.S. and international markets.

-- Buck

Hershey's 1.6% organic sales uptick was essentially unchanged from the prior quarter. But looking behind that top-line figure reveals sharp differences between the U.S. market and the candy giant's international segment.

At home, sales volumes edged lower while increased prices pushed revenue up. Hershey also spent aggressively on advertising in the U.S. to support its brands.

These trends all moved in the opposite direction in international markets, where price declines were offset by robust volume gains. Earnings soared as Hershey scaled back on marketing to right-size investment spending, executives said. Still, the company gained market share both at home and in key outside markets like China, India, and Mexico.

Getting more profitable

Hershey adjusted gross profit increased 4.4% resulting in an adjusted gross margin of 44.8%, an increase of 80 basis points versus the third quarter of 2018. This was driven by favorable commodities and net price realization.

-- CFO Steve Voskuil

Adjusted earnings jumped 3.9% and outpaced sales gains as gross profit margin growth more than offset Hershey's extra spending on advertising. Executives said investors should temper their expectations for profitability gains in the short term, though, as gross margin gains in the fiscal third quarter should be below the 0.8 percentage point boost that occurred this past quarter.

Management stressed the fact that the broader trend is decidedly positive, thanks in part to new salty snack brands being added to the portfolio. "We continue to be pleased with the underlying momentum in our margin expansion initiatives and the business reinvestment it is enabling," Voskuil said.

Ready for prime time

Our Halloween season is off to a solid start, and sell-in was strong after a successful 2018 season. The power of our core brands, breadth of our product lineup, and incremental capacity are enabling us to deliver great assortments and innovative packaging for our consumers.

-- Buck

Hershey has a busy few months ahead, starting with the seasonally crucial Halloween shopping period and moving right through the sweets-focused holidays in December. Management is optimistic that it will achieve growth over last year's banner results thanks to the combination of increased marketing and innovative products in key franchises like Reese's and Kit Kat. Surging sales gains in the SkinnyPop brand should help, too.

Executives say their Pirate's Booty products still aren't performing up to their expectations but should improve over the coming quarters. Altogether, organic sales gains will slow to about 1.5% this year from nearly 4% in 2018, they said.

The consumer staples giant sees challenges ahead but believes its stronger portfolio, higher pricing, and elevated marketing support put it in a good position to fight back toward that higher growth rate next year. "We are pleased with the progress we have made," Buck said, "but we continue to operate with a healthy dissatisfaction that drives us to push and elevate the business even further."

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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