On Friday, The Hershey Company (HSY 0.66%) released a strong third-quarter report. The confectionary and salty-snack maker's revenue and earnings beat Wall Street's expectations, and management raised full-year guidance for the top and bottom lines.
In the third quarter, Hershey's revenue grew 16% year over year to $2.73 billion, topping the $2.62 billion analyst consensus estimate. Growth was broad-based across its segments, which include North America confectionary, international, and North America salty snacks, with the latter being the fastest grower.
Adjusted for one-time items, operating profit rose 9.3% year over year. Adjusted net income landed at $447.1 million, or $2.17 per share, up 3.3%. While bottom-line growth was modest, there were good reasons for it, and the result still easily exceeded the adjusted earnings per share (EPS) of $2.10 that Wall Street had expected.
For the full year, management now projects both revenue and adjusted EPS to grow 14% to 15% year over year. This would be robust growth for any period, but it will be particularly impressive growth during a year when there are considerable inflationary pressures on input costs, many people are concerned about a possible recession, and supply chain issues persist.
Earnings releases tell only part of the story. Below are two key things management shared on Hershey's Q3 earnings call that you should know.
1. Consumer demand hasn't been hurt by high inflation
CEO Michele Buck said that while "inflation has driven some changes in consumers' shopping behaviors, including [sales] channels shopped and pack sizes purchased, our products have remained a key component of consumer baskets." She added that consumers continue to "prioritize snacking and particularly sweet treats."
Indeed, Hershey's business has been quite resilient. Surging inflation and widespread concerns about a recession are driving people to cut back their spending on many discretionary products, but not on Hershey's chocolate and other sweet offerings, or on its salty snack foods. Despite the company raising product prices by an average of 7.7% over the last year, its sales volume was higher in Q3 than in the year-ago period.
In my article on Hershey's second-quarter earnings, I explained the dynamic at play:
During tough economic times, many consumers will put off buying bigger-ticket items and then reward themselves for doing so by purchasing more inexpensive "treats," including candy. Moreover, many consumers find chocolate to be a comfort food, which also can help sales during challenging economic periods.
On the call, Buck echoed what I wrote above, and said that "historically, our category has tended to fare pretty well during these [tough and uncertain economic] times." Along with the company's business, its stock has also been resilient. During the Great Recession, which lasted from late 2006 through mid-2008, Hershey stock's return was negative 7.2%, while the S&P 500 index's return was negative 36%.
Image source: Hershey.
2. Ramping up production capacity
From Buck's remarks:
We certainly have a continuous effort [at] broadening our capacity, certainly focused only on where we see those really strong returns. Next year, for example, we are planning for five new manufacturing lines to start up throughout the year, and that includes three new Reese's lines, so we do expect a pretty nice increase in capacity. ... [W]e do have continuous capacity coming online into the future years, with a big focus on '23 and '24.
Hershey's Q3 revenue growth was strong, as previously discussed. It would have been even more robust had the company not been capacity constrained for certain products, including its phenomenally popular Reese's brand, which combines chocolate and peanut butter. In Q3, Reese's retail sales grew more than 16% year over year.
The good news for investors is that Hershey began a major ramp-up in capacity this year. In Q3, two new Reese's lines came online, and so did its new gummy capacity, "producing its first salable case of Jolly Rancher Gummies within the quarter," according to CFO Steve Voskuil. The Jolly Ranchers brand is best known for its fruit-flavored hard candies.
Expanding its Jolly Rancher brand into the popular gummy category or form is a great example of the kind of brand building at which Hershey excels. The company also recently launched Twizzlers Gummies, and this new product will be in stores across the U.S. beginning this month. Twizzlers is Hershey's well-loved licorice brand.
