Hershey benefits from pricing when volume declines.
According to president and CEO Michele G. Buck, “increased levels of competitive innovation within both the chocolate and sweets categories” contributed to the company’s latest quarter’s market share decline for Reese’s and Twizzlers.
During an earnings call on July 27, Ms. Buck stated, “I think many folks have been focused — certainly we’ve been focused — a lot on execution and meeting demand for the past few years and focused on the core with innovation not playing as big of a role.” “And I believe that rivals in the market are only now beginning to step up innovation to previously unheard-of heights. And as we move forward, we will undoubtedly concentrate on that while also continuing to expand our capacity.
The second quarter ending July 2nd saw a 29% rise in net income to $406.96 million, or $2.03 per share on the common stock, from $315.56 million, or $1.57 per share, during the same time last year. From $372.42 million to $412.53 million, the adjusted net income increased by 11%.
From $2.37 billion to $2.49 billion in net sales the previous year, there was a 5% rise.
Chief financial officer Steven E. Voskuil stated in prepared remarks, “We delivered another solid quarter across our three segments with price realization offsetting inflation, productivity enabling margin expansion, and flat volumes excluding the impact of anticipated inventory headwinds.” “Despite growing costs in several critical areas, this performance and strong insight into second-half programming, pricing, and inflation gives us confidence to raise our full-year adjusted earnings outlook.”
According to Mr. Voskuil, “as incremental pricing is expected to be largely offset by comparable volume declines as elasticities return to historical levels,” management continues to project net sales growth of 8% for the entire year.
In contrast to its previous guidance of 15%, the company now projects reported earnings-per-share growth of 13% to 15% and adjusted earnings-per-share growth of 11% to 12%.
The North America Confectionery segment’s income in the second quarter increased 6.2% to $657.18 million from $618.86 million due to growth in sales and gross margin expansion more than offsetting higher investments in brand marketing and capabilities.
Net sales for the segment increased 4.4% to $1.99 billion from $1.91 billion the previous year. Organic, constant currency net sales increased 4.8% as price increases exceeded the anticipated decreases in volume due to price elasticity and inventory timing.
Price elasticity “remained well ahead of historical levels, increasing slightly versus the first quarter, in line with expectations,” according to Ms. Buck. “We anticipate that as the year goes on and 2024 approaches, elasticities will progressively rise.”
A negative category mix and competitive activity resulted in a roughly 80 basis point decline in the company’s market share for candies, mints, and gum.
“Now that we have more co-manufacturing space secured for sweets for next year, along with our increased chocolate capacity this year, we can more aggressively pursue growth opportunities to improve our market share performance,” Ms. Buck stated. “In order to bring the merchandising share back to historical levels in 2024, this will involve increased innovation, distribution expansion, and targeted increases in promotional activity.”
“The second half of 2023 will see some of the effects of these investments, with Halloween retail sales expected to rise by double digits over the previous year as we improve our ability to meet customer demand.”
Revenue for the Salty Snacks segment in North America increased by 17% to $43.75 million from $37.43 million. According to Ms. Buck, segment net sales rose 6.3% to $272.37 million from $256.3 million, helped by price increases that countered volume declines brought on by changes in promotional activity or timing as well as difficulties with go-to-market execution.
In spite of increased private label activity, Ms. Buck stated that Hershey gained market share in the ready-to-eat popcorn and pretzel categories, led by Skinny Pop and Dot’s, which have “healthy” household penetration.
With sales of $224.84 million, up 8.5% from $207.18 million, the international segment income climbed 34% to $41.1 million from $30.7 million. A balanced increase in both price and volume drove a 6.2% increase in organic, constant currency net sales.
“Hershey continues to gain share by increasing household penetration through innovation and distribution gains,” Ms. Buck stated. “Category trends across markets remain strong.” “Margins are still strong; during the quarter, the segment operating profit margin increased by 350 basis points.”
According to Ms. Buck, the company is preparing for a “very strong Halloween,” noting that customers value seasonal customs even in lean economic times.
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“We are participating in the big displays that customers are planning, and we also have strong marketing support for consumers planned,” the spokesperson stated. “We have adopted a strategy of anticipating Halloween and are confident that there will be an abundance of confectionery available.”
Hershey’s net income increased by 17% to $994.17 million, or $4.96 per share, for the six months that concluded on July 2 from $849.03 million, or $4.24 per share, during the comparable period. From $2.25 billion to $2.51 billion, net sales grew by 12%.
Trading on the New York Stock Exchange, Hershey’s shares closed at $233.56 on July 27, 2.9% lower than the previous close of $240.44.