Under the Spotlight Wall St: The Hershey Company (HSY)
Hershey’s has captivated generations with its chocolate bars. But is the business in a sweet spot or could it be going sour? Let’s put it Under the Spotlight.
If you were born and raised in Australia, chances are Hershey’s probably isn’t the first brand to spring to mind when you think about chocolate. While Cadbury ($MDLZ) and Nestlé ($NSRGY) hold the lion’s share of chocolate sales in the country, Hershey’s dominates in the U.S., holding a firm grip over about a third of the local market.
The roots of Hershey's can be traced back to 1894, when Milton S. Hershey founded the Lancaster Caramel Company in Lancaster, Pennsylvania. Hershey's initial venture into the confectionery industry centred around caramels, a popular treat at the time. His exceptional skill in caramel making and his determination to perfect the art of candy production laid the foundation for his future success.
Hershey's journey took a transformative turn in 1900 when he sold the Lancaster Caramel Company for a substantial sum of money. With this new-found capital, he set his sights on a grander vision: creating a company that would produce affordable chocolate for the masses. Hershey's ambition would soon shape the confectionery landscape.
The creation of the Hershey's Milk Chocolate Bar in 1905 marked a turning point in the company's history. The introduction of inexpensive, high-quality milk chocolate to a broader public revolutionised the confectionery industry. This pioneering move set the stage for Hershey's enduring success as a brand cherished by consumers.
The company's commitment to innovation also extended beyond its classic chocolate bars. The introduction of Hershey's Kisses in 1926, with their distinctive foil wrapping and "kiss" sound, became an iconic treat.
One of the key drivers of Hershey’s growth has been acquisitions the company has made. Arguably the most important one was also the first: H.B. Reese Candy Company. Harry Reese, a former Hershey’s employee, created one of America’s most beloved chocolates, the Reese’s Peanut Butter Cup. In 1963, Hershey’s would acquire the brand, consolidating its power in the chocolate business.
In the following years, the candy giant continued to expand, further diversifying its product lines and customer base. In 1969, Hershey’s acquired the licence in the U.S. to produce Kit Kat and Rolo, brands then owned by Rowntree’s, but now by Nestlé, in the rest of the world. And in 1977, the company notably bought Y&S Candies, the manufacturer of Twizzlers licorice candy.
It wasn’t until the 2000s that Hershey’s would go on a more active buying spree. The company acquired boutique chocolate makers like Scharffen Berger in 2005, Dagoba in 2006 and the Canadian company Brookside Foods in 2015. In late 2017, Hershey’s entered into an agreement to buy another snacking giant, Amplify Snack Brands, the maker of SkinnyPop popcorn, and in 2021 they acquired Dot’s Pretzels, further expanding their salty snacks options.
Not all of Hershey’s acquisitions have worked out well. Krave Jerky, a brand bought for US$250m in 2015, was sold for US$218m in 2020 after Hershey’s failed to successfully integrate it into its product mix. Hershey’s also divested from the potato chip maker Tyrrells in 2018, which was owned by Amplify.
Salty snacks make up a small portion of Hershey’s overall business. Of the US$742m income the company generated in Q2 2023, only US$43.75m came from this sector. International sales also play a more minor role in the company’s earnings, accounting for just US$41.10m of income in the same period. Hence, the brand still remains extremely focused on North America, which accounted for US$657m of income in 2023’s second quarter.
One reason why chocolate sales outside the U.S. and Canada are lower might lie in the formula. Hershey’s says it does not put butyric acid – a colourless liquid with an unpleasant smell – in its products. Yet, outside of North America, the chocolate has a reputation among some consumers for having an unfamiliar taste.
That’s not to say the confectionery colossus’ earnings are deteriorating. In fact, it’s quite the opposite. Income has been growing in all of its business segments, up 6.2% year-on-year in North America, 17.1% in salty snacks and 34% internationally, even though the latter two don’t make up a big part of sales and earnings. Net margins have also been improving, rising to 16.1% in Q2 2023 from 13.3% in the same period a year earlier.
Since 2019, the company’s earnings have been higher than analysts’ estimates, but an unavoidable obstacle might break this streak: cocoa prices. Most of the world’s cocoa is produced in West Africa, which has suffered from extreme weather events. Higher fertiliser prices due to conflict in Europe haven’t helped either, as cocoa is an extremely fertiliser-intensive crop. As a result, cocoa prices have risen significantly over the last year.
Hershey’s doesn’t believe this will affect sales, which are still expected to grow 8% during the firm’s fiscal year. However, the company has lowered its guidance on this year’s earnings, down from 15% to the 13%-15% range. Not as positive as some would like, but still hitting a sweet spot.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.