Hershey's (HSY) Cost-Saving Initiatives Look Promising

On Mar 10, we issued an updated research report on Hershey, PA-based largest chocolate maker The Hershey CompanyHSY .

Although soft international sales due to macro headwinds, changing consumer shopping habits and intense competition from the broader snacking environment in the U.S. were mainly responsible for the soft sales results since 2014, its strong brand portfolio, innovation along with productivity improvement and cost savings make it an attractive option for investors.


If we are to discuss the major hiccups that this chocolate maker has been facing of late, sluggish sales growth, currency headwinds and a shift in consumer taste to healthier snack options are the main concerns. Hershey, like many other U.S. food producers like Mondelez International, Inc. MDLZ , ConAgra Foods Inc. CAG and food giant General Mills, Inc. GIS , has been facing the brunt of shifting consumer preference toward natural and organic ingredients over packaged and processed food.

Hershey's sales declined 0.5% in 2015 and the weakness continued in 2016 with sales rising a meager 0.7% owing to persistently weak demand in China.

In fact, the company has also been witnessing chocolate category softness in key international markets like China. During the fourth quarter, China chocolate category retail sales dropped 4%, same as in the second and third quarter of 2016.

Again, higher supply chain costs and trade investments are continuously impacting the company's productivity and cost-saving benefits. Hershey's overall gross margin contracted 50 basis points or bps in the fourth quarter and 40 bps in 2016 as negative product mix, excess packaging/higher supply chain costs offset productivity cost savings.

What's Driving the Stock?

Hershey is the largest producer of quality chocolate products in the U.S. It markets some of the world's leading brands which enjoy widespread consumer acceptance. The company is trying to improve its performance through innovation and regularly brings change to its core brands to meet consumer demand that will boost its top line. Innovation is expected to contribute more in 2017.

Importantly, in order to counter tepid sales, management has optimized its North American manufacturing footprint, added manufacturing capabilities in international markets, increased supply chain productivity, invested in cost-cutting projects and improved the sales mix significantly under its continuous improvement and productivity ("CIP") program.

Meanwhile, the company unveiled a new cost savings program, Margin for Growth, to boost profitability. The international division is expected to significantly contract its operating loss in 2018 on the back of the latest program.

Recently, Hershey unveiled plans to revamp the North America confectionery and snacks business and also return its international businesses to profitability at the earliest. The company announced that as part of its Margin for Growth multi-year program, it will reduce its global workforce outside the U.S. by 15%. This program will likely generate cash savings at an annual run-rate of $150 million to $175 million by end-2019 (read more: Hershey to Lay Off 15% of Workforce to Fuel Growth ).

Meanwhile, the company's fourth-quarter earnings improved 8.3% year over year as demand strengthened in the U.S. Moreover, a lower tax rate has offset the impact of relatively weaker margins.

Stock Performance

Hershey's shares have outperformed the Zacks categorized Food-Confectionary industry in the last one year. The company's shares gained around 17.9% while the broader industry declined 8.7%.

Estimates also moved higher by 3% for 2017 and 2.8% for 2018 over the last 60 days. Hershey has been able to beat earnings estimates in all of the past four quarters. The company's productivity improvement and cost-saving initiatives should drive the stock's performance in the upcoming quarters as well.

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Hershey Company (The) (HSY): Free Stock Analysis Report

General Mills, Inc. (GIS): Free Stock Analysis Report

ConAgra Foods Inc. (CAG): Free Stock Analysis Report

Mondelez International, Inc. (MDLZ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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