On Thursday, shares of Hershey (HSY -0.53%) fell 2.9%, following the confectionary and snack-food giant's release of its second-quarter 2023 report.
The company behind such iconic brands as its namesake brand, Reese's, and Twizzlers slightly missed Wall Street's expectation for revenue and exceeded it for adjusted earnings. Management also gave a small boost to its 2023 adjusted earnings guidance, though it left the top-line expectation unchanged.
So why did shares decline 2.9% on Thursday? Revenue was probably the main culprit, as the quarter's top line fell a bit short of the analyst consensus estimate and management did not increase its 2023 revenue guidance. Moreover, some investors might have preferred to see the quarter's revenue increase come at least partially from volume gains, rather than entirely from price increases.
That said, the broader market also exerted a headwind on Hershey stock, as all major indexes were down on Thursday.
Here's an overview of Hershey's Q2 results and annual guidance centered around five key metrics.
1. Revenue grew 5%
Hershey's net quarterly sales grew 5% year over year to $2.49 billion, slightly missing the $2.5 billion Wall Street had expected. "Core revenue" growth (which is organic growth in constant currency) was also 5%.
Core revenue growth came from 7.7% higher product prices offset by a decrease of 2.7% due to lower volume/product mix.
| Segment | Q2 2023 Revenue | Change (YOY) |
|---|---|---|
| North America confectionary | $1.99 billion | 4.4% |
| North America salty snacks | $272.4 million | 6.3% |
| International | $224.8 million | 8.5% |
| Total | $2.49 billion | 5% |
Data source: Hershey. YOY = year over year.
2. Adjusted operating income increased 8.3%
Operating profit according to generally accepted accounting principles (GAAP) was $560.7 million, up 23% year over year. Adjusted operating profit came in at $570.9 million, up 8.3%. The rise in this metric was driven by higher prices and improved productivity more than offsetting increases in supply chain investments and brand investments.
| Segment | Q2 2023 Operating Income | Change (YOY) | Operating Margin* |
|---|---|---|---|
| North America confectionary | $657.2 million | 6.2% | 33% |
| North America salty snacks | $43.8 million | 17% | 16.1% |
| International | $41.1 million | 34% | 18.3% |
| Total segment operating income | $742.0 million | 8% | 29.8% |
Data source: Hershey. *Segment operating margin = segment operating income divided by revenue.
Hershey is doing a great job in improving the profitability of its salty snacks business, whose size it has increased considerably over the last few years via acquisitions. This segment's operating margin was 14.6% in the year-ago period.
The other two segments also expanded their operating margin relative to the year-ago period. In Q2 2022, this metric for North America was 32.4% and for international it was 14.8%.
3. Adjusted earnings per share (EPS) jumped 12%
GAAP net income was $407 million, or $1.98 per share, up 29% year over year. Adjusted for one-time items, net income landed at $412.5 million, or $2.01 per share, up 12%. This result easily beat the adjusted EPS of $1.91 Wall Street had expected.
4. Cash from operations declined 5.7% in the first half of 2023
For the first half of 2023, Hershey generated cash of $1.05 billion running its operations, down 5.7% from the year-ago period. It ended the quarter with cash and cash equivalents of $446.2 million and long-term debt of $4.09 billion.
5. 2023 adjusted EPS guidance (at midpoint of range) raised by half a percentage point
Hershey revised its 2023 guidance as follows: reaffirmed its revenue expectation, slightly lowered its GAAP EPS expectation, and slightly raised its adjusted EPS expectation.
In my view, investors should put more weight on the adjusted EPS outlook being raised than on the GAAP EPS outlook being lowered. The latter was lowered to reflect additional acquisition costs.
| Metric | Initial Guidance Issued on Feb. 2, 2023 | Guidance Issued on April 27, 2023 | Current Guidance |
|---|---|---|---|
| 2023 revenue growth | 6% to 8% | 8% | 8% |
| 2023 GAAP EPS growth | 11% to 15% | 15% | 13% to 15% |
| 2023 adjusted EPS growth | 9% to 11% | 11% | 11% to 12% |
Data source: Hershey.
A solid quarter
Granted, Hershey's Q2 results were not as robust as its more recent prior quarterly results. Nonetheless, the company still turned in a solid report.
Notably, year-over-year adjusted earnings increased more than twice as much percentage-wise as did revenue. This reflects an expanding profit margin.
Investors shouldn't be overly concerned about the effects a recession could have on Hershey's growth prospects. As I wrote last quarter, during tough macroeconomic times, "many consumers cut back on or delay purchasing bigger ticket items and then "reward" themselves by buying smaller, affordable luxuries, such as chocolate."
