10-K: Hershey Company Releases 2023 Annual Report, Highlights Strategic Initiatives and Financial Performance

The Hershey Company's 2023 annual report details a year of growth driven by strategic acquisitions, price increases, and a focus on long-term sustainability.

Summary

• The Hershey Company's 2023 annual report shows a 7.2% increase in net sales to $11.165 billion, primarily due to an 8.3% favorable price realization.
• The company experienced a slight volume decrease of 1.3% due to reduced consumer demand in core U.S. confectionery brands.
• Gross profit increased by 11.1% to $4.998 billion, with a gross margin of 44.8%, up from 43.2% in 2022.
• Operating profit rose by 13.3% to $2.561 billion, with an operating profit margin of 22.9%.
• Net income attributable to The Hershey Company was $1.862 billion, a 13.2% increase from the previous year.
• Diluted earnings per share increased by 13.8% to $9.06.
• The company completed the acquisition of certain assets from Weaver Popcorn Manufacturing, Inc. on May 31, 2023, to enhance manufacturing capacity.
• The report highlights the company's commitment to sustainability, including a 50% reduction in Scope 1 and 2 GHG emissions and a 25% reduction in Scope 3 GHG emissions by 2030.
• The company also aims to have 100% of plastic packaging be recyclable, reusable, or compostable and eliminate 25 million pounds of packaging by 2030.
• The company's international operations accounted for 12.7% of total net sales in 2023.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong financial results and strategic initiatives, but also acknowledges challenges and risks, resulting in a moderately positive sentiment.

Positives

• The company achieved significant growth in net sales, gross profit, operating profit, and net income.
• Hershey's improved its gross profit margin, indicating better cost management and pricing strategies.
• The acquisition of Weaver Popcorn Manufacturing, Inc. is expected to strengthen the company's supply chain.
• The company's commitment to sustainability and ESG initiatives demonstrates a focus on long-term value creation.
• Hershey's maintained fair and equitable pay achievements, including 1:1 aggregate people of color pay equity and 1:1 aggregate gender pay for salaried employees in the United States.

Negatives

• The company experienced a slight volume decrease of 1.3% due to reduced consumer demand in core U.S. confectionery brands.
• The company faced higher supply chain costs, including higher labor costs, which partially offset gains from price increases.
• The company experienced a decline in market share in both the CMG and Salty categories in the U.S. market.
• The company incurred higher write-downs on equity investments qualifying for tax credits.

Risks

• The company's reputation could be impacted by issues related to product quality, safety, human rights, or environmental practices.
• Disruptions to manufacturing operations or supply chains, including those caused by natural disasters, pandemics, or climate change, could negatively affect the company's ability to produce and deliver products.
• The company may face challenges in hiring, engaging, and retaining talented global human capital.
• Climate change and other environmental impacts, as well as increased focus on sustainability, could negatively affect the company's business and operations.
• Increases in raw material and energy costs, along with supply chain issues, could affect future financial results.
• Market demand for new and existing products could decline due to competition, changing consumer preferences, and health concerns.
• The company's financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures, and joint ventures.
• International operations may not achieve projected growth objectives due to various risks and uncertainties.
• Changes in governmental laws and regulations could increase costs and liabilities or impact demand for the company's products.
• Political, economic, and financial market conditions, including the ongoing conflict between Russia and Ukraine, could negatively impact financial results.
• Disruptions, failures, or security breaches of the company's information technology infrastructure could have a negative impact on operations.
• Complications with the design or implementation of the new enterprise resource planning system could adversely impact business and operations.

Future Outlook

The company aims to be a leading snacking powerhouse by driving core confection business, expanding into broader snacking categories, delivering profitable international growth, and leveraging differentiated capabilities while responsibly managing operations.

Management Comments

• The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products.
• We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products.
• We change prices and weights of our products when necessary to accommodate changes in input costs, the competitive environment and profit objectives, while at the same time maintaining consumer value.
• We believe our Product Excellence Program provides us with an effective product quality and safety program.
• We believe our employees are among our most important resources and are critical to our continued success.

Industry Context

The report indicates that the company operates in highly competitive markets with many other global multinational, national, regional, and local firms. The company is experiencing increased competition from other snack items and is expanding its portfolio through innovation and acquisitions to capture new snacking occasions.

Comparison to Industry Standards

• Hershey's performance is compared to the S&P 500 Index and the S&P 500 Packaged Foods Index, showing a cumulative total return of $193 compared to $207 and $156 respectively over the last five years.
• The company's U.S. retail takeaway increased by 6.0% in the expanded multi-outlet combined plus convenience store channels, while experiencing a market share decline of 83 basis points in the CMG category and 9 basis points in the Salty category.
• The report mentions that some of Hershey's competitors are large private companies and large retailers with significant resources and international operations, indicating a competitive landscape similar to other major players in the packaged foods industry such as Nestle, Mondelez, and PepsiCo.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to certain legal proceedings and claims arising out of the ordinary course of business, but these matters are not expected to have a material effect on the company's financial condition, results of operations, or cash flows.

Related Party Transactions

• The company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, to purchase shares of its Common Stock.
• The company sold certain real and personal property to Hershey Trust Company, as trustee for the School Trust, and donated a portion of the building to Hershey Trust Company, as trustee for The M.S. Hershey Foundation.

Stakeholder Impact

• Shareholders may be impacted by the company's financial performance, strategic initiatives, and share repurchase programs.
• Employees may be impacted by changes in compensation, benefits, and workplace policies.
• Customers may be impacted by changes in product offerings, pricing, and availability.
• Suppliers may be impacted by changes in the company's sourcing and procurement practices.
• Creditors may be impacted by changes in the company's debt levels and financial performance.

Next Steps

• The company will continue to expand its presence in digital commerce.
• The company will transform its manufacturing, commercial, and corporate operations through digital technologies.
• The company will enhance its data analytics capabilities to develop new commercial insights.
• The company will implement the Advancing Agility & Automation Initiative to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, and leverage new technology.

Key Dates

Keywords

confectionery, chocolate, salty snacks, acquisitions, sustainability, financial results, supply chain, ESG, international, innovation, market share, price increases, operating profit, net income, risk factors