Shareholders of The Hershey Company (HSY 0.57%) are optimistic heading into the company's first-quarter earnings report. Parts of the confectioner's business have surely been disrupted by the COVID-19 pandemic, which has stalled major economies around the world including the company's biggest market, the United States. Yet Hershey likely also enjoyed at least a temporary demand spike as consumers filled up their pantries with snacking supplies.
With that big picture in mind, let's look at a few trends worth watching when Hershey announces its results on Thursday, April 23.
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Organic sales growth
Most investors expect Hershey to report strong sales growth this week, with organic gains perhaps exceeding the 1.8% uptick that the company notched in 2019. Management previously guided for 2% to 4% net sales growth in 2020. The COVID-19 pandemic will have a mixed effect on the business, though, with negative trends partly offsetting the positive ones .
On the plus side, demand for its consumer staples likely jumped at supermarket chains and warehouse stores, which have seen record sales growth in recent weeks. Hershey had solid momentum heading into this period, too, as fourth-quarter revenue growth sped up slightly. Its portfolio now includes more salty snacks, and that diversity should help protect recent gains in market share at a disruptive time for most industries.
But the Easter holiday is an important one for candy sales, and its unclear how stay-at-home efforts have affected overall demand. Another key question is whether Hershey struggled with supply chain challenges in recent weeks. Overall, the company likely saw at least a temporary sales acceleration this quarter.
Profit margins
Before the pandemic, investors had good reasons to expect strong earnings in 2020. Hershey has been raising prices on most of its portfolio while adding more high-margin brands from the Amplify and Pirate franchises, and those combined efforts helped lift adjusted gross margin up to 43.4% of sales last quarter, compared with 42.5% a year ago. The gains were erased by higher expenses in other areas of the business, especially marketing.
But CEO Michele Buck and her team predicted a return to margin expansion in 2020. We'll find out on Thursday if the company is still on track to meet that objective, or if supply and manufacturing challenges tied to COVID-19 temporarily knocked it off that path.
Looking ahead
Hershey should update investors on the company's financial condition, which is taking on more importance as more companies move to preserve cash. At its last check, that position looked strong. Hershey had roughly $500 million of cash on the books at the end of 2019 and generated $1.8 billion of cash from operations in the past year. However, the company has also put pressure on its balance sheet to fund recent acquisitions, and debt totaled $4.2 billion last quarter.
Finally, look for management's updated sales outlook that reflects all the latest demand trends. The economic slowdown that has accompanied the pandemic will add risk and uncertainty to management's projections.
Yet Hershey's position as a marketer of staple snacks and sweets might allow management to maintain or even boost its forecast that today calls for organic sales to rise between 1% and 3% as adjusted earnings expand 6% to 8%, to as high as $6.24 per share in 2020.
