Hershey (NYSE:HSY) says it is seeing only a small negative impact on its business to date from the COVID-19 pandemic. While social distancing efforts have pushed sales lower for parts of its snack and treats portfolio, including gums and mints, the consumer staples giant is seeing a boost in demand in other areas, such as baking products.
A far different cadence to shopping and convenience purchases threatens to hurt profitability over the short term, executives said in a recent conference call with Wall Street analysts. However, CEO Michele Buck and her team expressed confidence in their wider growth plan.
Let's take a closer look at three items to come out of the latest Hershey's earnings report.
1. A good Easter
"We delivered a solid Easter season despite the significant disruptions we saw in both the retail environment and in consumers' lives." -- Buck
The Easter season was a good one for the business even though stay-at-home orders pressured results. Hershey launched popular new products in both the Kit Kat and Reese's franchises, but the bigger strategic win involved its supply chain.
The company managed to satisfy over 98% of demand in March and early April when pantry-stocking hit its peak. That success allowed the company to gain 3 percentage points of market share in the last month, management estimated.
2. Hits and misses
"While March trends were strong, the situation has evolved rapidly in April." -- Buck
The initial bounce in demand gave way to a tougher operating environment in recent weeks. Many products are still selling well, particularly through online sales channels. However, Hershey has noted a sharp drop in its convenience-based channel as shopper traffic slumped. Its mints and gums niche has plummeted by 50% thanks to decreased social interactions.
The company is also seeing a shift toward lower-priced products thanks to increased economic distress levels. That has led to declines in sales for its high-margin Skinny Pop and Pirate's Booty snacks.
"While many consumers have shared how our categories are helping them cope during this time and bond with their families," Buck explained, "they've also shared how their shopping priorities have changed."
3. A bright long-term outlook
"We remain confident in our ability to deliver against our long-term productivity goals." -- CFO Steve Voskuil
Hershey is in a strong financial position, with over $1 billion of cash on the books as of late March. Yet management is still marshaling resources and preparing for a difficult consumer environment that might stretch beyond just the fiscal second quarter.
Recent moves on this score include pushing about $100 million of planned capital spending into 2021, cutting inefficient marketing, and taking advantage of recent drops in commodity costs. "We want to provide reassurance that we are being both proactive and agile in managing our performance as the pandemic unfolds," Voskuil said.
Hershey withdrew its 2020 outlook while citing the volatile demand environment, which currently implies just modest sales declines but a bigger hit to profitability. The long-term outlook hasn't changed, and in fact, the company might see faster earnings growth in 2021 and beyond. There are some big risks to that boost, though, including the path of the eventual economic growth rebound and the timing of the return of shopper traffic to places such as malls and convenience stores.