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Hershey Looks Rich Right Now

By Demitri Kalogeropoulos - Updated Apr 24, 2020 at 4:30PM

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The candy and snack giant just reported falling global sales volumes.

The COVID-19 pandemic is having a minor negative impact on Hershey's (HSY 2.71%) business so far. The confectioner this week revealed a sharp demand slump in China during the fiscal first quarter, but steady sales in the U.S. market even as stay-at-home mandates started sweeping the country.

While the overall result was solid revenue and profit trends, management still decided to pull its 2020 financial outlook during this volatile time.

Let's look at some standout numbers from the report.

A woman enjoying a candy bar.

Image source: Getty Images.

Sales are steady

Hershey's sales varied widely between its international and domestic segments. Revenue in the U.S. rose 2% as higher prices more than offset a slight volume decline. Executives said demand through early April was robust across its retailing network, especially for its newly acquired salty snack brands like Skinny Pop and Pirate's Booty. These products likely attracted more demand as consumer stocked their pantries and increased their stay-at-home time.

The international segment was a different story, with volume collapsing by 45% in China, which was under strict social distancing mandates. Sales fell in India, too, contributing to an 8% drop in the wider international segment after currency swings are accounted for.

Overall organic sales fell 1% compared to a 2% increase through fiscal 2019. "The first quarter performance was relatively in line with expectations," management said in a press release, "with a modest impact from COVID-19."

Profits and cash

Hershey's finances showed no sign of strain from the pandemic. Gross profit margin improved to 46.6% of sales from 45.7%, mainly thanks to the demand shift toward profitable salty snacks. Adjusted operating margin held steady at 23% of sales because executives chose to ramp up advertising spending in the period and make other investments in growth initiatives.

The company has plenty of cash on the books, counting $1.1 billion of liquidity compared to $500 million in late December after tapping part of its credit line. Executives said those saving should support the business through the tough economic environment ahead. "The company believes it has sufficient liquidity to satisfy its cash needs," management explained.

About that rally

Citing rapidly evolving consumer shopping behavior, and the uncertain path of the virus, Hershey pulled its 2020 outlook, which had called for sales growth of between 2% and 4%. Management's long-term forecast hasn't changed, though; it still sees annual sales gains at about 3%, coupled with earnings growth of between 6% and 8% as the business gets more profitable each year.

Fiscal 2020 looks set to undershoot those goals as COVID-19 temporarily pressures results in China and North America, and possibly other areas. But there's nothing in this report that suggests an enduring hit to Hershey's business or a real threat to its liquidity. That means shareholders should be happy to continue holding the stock.

If you don't already own it, you might want to wait before purchasing shares of this consumer staples giant. The 20% rally the stock has seen in the past year reflects plenty of optimism already, especially given that sales volumes are falling right now.

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