Investors had modest expectations heading into Hershey's (HSY 0.60%) third-quarter report. The confectioner had reported declining organic sales in each of the past two quarters, after all, as the pandemic had a mixed impact on its snacking, baking, and candy portfolio.
Hershey's actual results came in better than expected in a few metrics, including growth and profitability. The candy giant also saw enough stability in sales trends to reinstate its fiscal year outlook.
More on that forecast in a moment, but first let's dig into the third-quarter numbers.
Sales sped up
CEO Michele Buck and her team had predicted a return to sales growth in the second half of 2020, and that's exactly what happened in Q3. Organic sales rose 3.8% compared to a 3.5% drop in Q2. That allowed net sales to rise by 4% to edge past the 1% uptick that most investors were expecting.
Image source: Getty Images.
There was plenty for investors to like about Hershey's growth beyond just that headline sales figure. The company benefited from higher sales volumes and rising average prices. It gained market share in the core U.S. segment during the Halloween shopping crunch. And Hershey noted rebounds in some of the niches that were hit hard by the COVID-19 pandemic, like mints and gums. "Our core U.S. business remains healthy as consumers reach for small treats during the pandemic," Buck said in a press release.
Those wins were offset slightly by an international segment that's still being pressured by COVID-19 retailing closures and sluggish economic growth trends. The international division shrank 9% in the quarter.
Financial updates
The news was positive on the financial side, with gross profit margin rising to 48.7% of sales from 44.2% a year ago. Part of that improvement came from accounting adjustments, but Hershey logged a margin increase even after removing that temporary lift.
Non-GAAP operating profit rose to 24.5% of sales from 22.3% a year ago, which allowed adjusted earnings per share to rise 15.5% compared to the 4% increase in reported sales.
Supporting this spike were factors like rising candy prices and decreased advertising spending. Hershey also cut costs in other areas of the business, helping support a further boost in operating cash flow.
HSY Cash from Operations (TTM) data by YCharts
The sweet outlook
Hershey executives still see many risks to the short-term outlook -- especially the dampening effect of further COVID-19 outbreaks and new retailing closures in key markets. But they've seen enough stability in recent trends to reinstate a 2020 forecast.
That outlook now calls for organic sales to be roughly flat this year as a sharp rebound in the U.S. market is mostly offset by weakness in other geographies. Adjusted earnings gains will reflect its improving profitability, with profits rising by between 7% and 8%.
Fiscal 2021 might bring a better balance between sales and profitability gains, and investors will be eager to see more of the revenue growth coming from volume spikes rather than simply higher prices. But shareholders will have to wait for Hershey's final 2020 report before they can judge management's detailed expansion outlook.
