On Friday, The Hershey Company (HSY 1.32%) capped off Halloween week with a treat for its investors in the form of its third-quarter report. The confectionary and salty-snack maker's revenue and earnings exceeded Wall Street's expectations, and management issued another round of full-year guidance raises for both the top and bottom lines.
The company's string of strong quarterly reports has helped boost its stock's 2022 total return to 20% -- that's 40% better than the broader market's performance, as the S&P 500's return is in the red by 20%.
It's not too late for folks who have a long-term investing horizon to consider buying this dividend-paying stock, which is currently yielding 1.81%. Most Americans aren't likely to let inflation-driven higher product prices or even a recession interfere with their love affairs with their favorite chocolates and other snacks.
Here's an overview of Hershey's third-quarter and 2022 guidance centered around five key metrics.
Image source: Hershey.
1. Revenue jumped 16%
Hershey's net quarterly sales grew 16% year over year to $2.73 billion, surpassing the $2.62 billion Wall Street had expected.
"Core revenue" growth was 12%. This figure excludes the 4.1% revenue contribution from acquisitions made over the last year (Pretzels Inc., Dot's Pretzels, and Lily's Sweets) and a 0.3% headwind from foreign currency. Core growth came from just over 7% higher product prices and more than 4% higher volume/product mix.
Hershey's sales are predominantly in North America (92% in the third quarter), so its revenue hasn't been hurt much by the U.S. dollar's appreciation relative to other currencies.
Here's how third-quarter revenue broke down by segment:
| Segment | Q3 2022 Revenue | Change (YOY) | Impact of Acquisitions (YOY) |
|---|---|---|---|
| North America confectionary | $2.25 billion | 10% | N/A |
| North America salty snacks | $275 million | 87% | 66% |
| International | $218 million | 15% | N/A |
| Total | $2.73 billion | 16% | 4.1% |
Data source: Hershey. YOY = year over year.
A few takeaways:
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The company experienced favorable price elasticities across segments, meaning that higher prices didn't dampen consumer demand for its products.
-
As I wrote last quarter, "Hershey's strong pricing power isn't too surprising because the company owns many top brands that have been consumer favorites for generations, including its namesake brand, Reese's, Kit Kat, and Twizzlers, along with newer brands that consumers love, such as SkinnyPop Popcorn."
- The company's expansion into salty snacks was a smart move, as reflected by this segment's hefty revenue growth.
- That said, the North America confectionary segment remains the company's profit driver. It contributed 82% to total sales, though an outsized 90% to segment net income. Salty snacks' contributions to total sales and segment net income were 10% and 5.7%, respectively. These contributions were 8% and 4.5% from international.
2. Adjusted operating income increased 9.3%
Operating profit according to generally accepted accounting principles (GAAP) was $556.6 million, down about 3% year over year. Adjusted operating profit came in at $615.3 million, up 9.3%.
This was solid adjusted operating income growth, though it lagged the company's revenue growth. That was due to inflationary pressures on costs and stepped-up investments in its operations, including expanding the distribution channels and marketing of its newly acquired brands. These higher costs were only partially offset by its product price increases.
3. Adjusted earnings per share (EPS) grew 3.3%
GAAP net income was $399.5 million, or $1.94 per share, down about 9% year over year. Adjusted for one-time items, net income landed at $447.1 million, or $2.17 per share, up 3.3%. This result beat the adjusted EPS of $2.10 Wall Street had expected.
Adjusted EPS growth was less than revenue growth for the reasons mentioned in the last section plus ramped-up investments in growth initiatives, including acquisition activities.
Adjusted EPS growth of 3.3% is quite modest, but there's no reason for concern. Investors should pay more attention to annual results, as quarterly results can be "lumpy" for various good reasons. Importantly, the company expects full-year adjusted EPS growth of 14% to 15%, which would be a robust showing.
4. Cash from operations for the first nine months of 2022 rose 11%
In the first three quarters of this year, Hershey generated cash of $1.56 billion running its operations, up 11% from the year-ago period. It ended the period with cash and cash equivalents of $327.7 million and long-term debt of $3.34 billion.
5. Annual adjusted EPS guidance (at midpoint of range) raised by 1.5 percentage points
Citing "higher than anticipated consumer demand and favorable price elasticities across segments," Hershey increased its 2022 guidance for revenue, GAAP EPS, and adjusted EPS.
| Metric | Initial Guidance | First Update to Guidance | Second Update to Guidance | Current Guidance |
|---|---|---|---|---|
| 2022 annual revenue growth | 8% to 10% | 10% to 12% | 12% to 14% | 14% to 15%* |
| 2022 annual GAAP EPS growth | 7% to 10% | 8% to 11% | 9% to 12% | 11% to 13% |
| 2022 annual adjusted EPS growth | 9% to 11% | 10% to 12% | 12% to 14% | 14% to 15% |
Data source: Hershey. *Acquisitions made within the last year are anticipated to contribute 4% to 5% to 2022 revenue growth, unchanged from the first and second upward revisions to guidance, and up from 3% to 4% in the initial guidance.
In short, Hershey turned in another robust quarter and its outlook is bright.
