10-Q: Hershey's Q2 2024 Results: Sales and Earnings Decline Amidst Economic Shifts

Hershey's second quarter results show a significant decrease in sales and earnings, primarily due to volume declines in the core U.S. confectionery business and increased commodity costs.

Summary

• Hershey's net sales decreased by 16.7% in the second quarter of 2024 compared to the same period in 2023, totaling $2,074.5 million.
• The decline in sales was primarily driven by an 18% decrease in volume, particularly in the U.S. confectionery segment, which was partially offset by a 1% increase in price realization.
• Gross margin decreased to 40.2% from 45.5% due to unfavorable commodity costs, mark-to-market impacts from commodity derivatives, and increased business realignment costs.
• Operating profit decreased by 48.7% to $287.9 million, and net income fell by 55.6% to $180.9 million.
• The company's effective tax rate increased to 26.4% from 7.4% in the prior year's quarter.
• For the first six months of 2024, net sales decreased by 2.8% to $5,327.2 million, and net income decreased by 1.6% to $978.3 million.
• The company is experiencing a dynamic macroeconomic environment, including price volatility for commodities like cocoa, which has increased by approximately 75% since the beginning of the year.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant declines in sales and earnings, increased costs, and a challenging macroeconomic environment. While there are some positives, the overall tone is concerning from an investment perspective.

Positives

• The North America Salty Snacks segment saw a 6.4% increase in net sales in Q2 2024, driven by volume growth.
• The company's total U.S. retail takeaway increased 0.5% in the first six months of 2024.
• The company is taking actions to preserve liquidity and manage discretionary spending.
• The company completed the implementation of a new enterprise resource planning (ERP) system in the second quarter of 2024.

Negatives

• The North America Confectionery segment experienced a 20.7% decrease in net sales in Q2 2024 due to volume declines.
• The International segment saw an 8.9% decrease in net sales in Q2 2024 due to volume declines.
• The company experienced a significant decrease in gross margin due to higher commodity costs and unfavorable derivative impacts.
• The company's effective tax rate increased significantly, impacting net income.
• The company experienced a decline in U.S. candy, mint, and gum (CMG) consumer takeaway and market share.

Risks

• The company is exposed to price volatility in commodities, particularly cocoa, which has seen a significant price increase.
• Geopolitical events, such as the conflict between Russia and Ukraine, could lead to economic and supply chain disruptions.
• Changes in consumer behavior and spending patterns could impact demand for the company's products.
• The company may not fully realize the expected cost savings from strategic initiatives or restructuring programs.
• Disruptions to the company's manufacturing operations or supply chain could negatively impact results.
• The company is subject to risks associated with climate change and other environmental impacts.

Future Outlook

The company expects 2024 capital expenditures, including capitalized software, to approximate $600 million to $625 million. The company is monitoring the macroeconomic environment and potential impacts on its business, including supply chain costs, inflation, and geopolitical events.

Management Comments

• Management noted that U.S. consumer behavior has continued to shift and evolve, impacting purchasing patterns.
• Management highlighted that higher prices for direct materials, particularly cocoa, are the primary incremental cost to the business.
• Management stated that they are continuing to monitor for any significant escalation or expansion of economic or supply chain disruptions or broader inflationary costs.

Industry Context

The results reflect broader challenges in the consumer goods sector, including inflation, supply chain issues, and changing consumer behavior. The company's performance is being impacted by increased commodity costs, particularly cocoa, which is affecting many players in the confectionery industry.

Comparison to Industry Standards

• Hershey's Q2 2024 results show a significant decline in sales and earnings, which is worse than the performance of some of its peers in the consumer staples sector.
• Companies like Mondelez and Nestle have also faced challenges related to inflation and supply chain disruptions, but their results have not shown as steep a decline in sales and earnings as Hershey's.
• The decline in Hershey's U.S. candy, mint, and gum (CMG) market share is a concern, as it indicates a loss of competitive position in a key market segment.
• The company's salty snacks segment is performing better than its confectionery segment, which is consistent with broader trends in the snack food industry.

Stakeholder Impact

• Shareholders will be negatively impacted by the decrease in net income and earnings per share.
• Employees may be affected by the company's cost-cutting measures and business realignment activities.
• Customers may experience price increases due to higher commodity costs.
• Suppliers may be affected by changes in the company's supply chain and purchasing practices.

Next Steps

• The company will continue to monitor the macroeconomic environment and take actions to preserve liquidity.
• The company will focus on managing supply chain costs and mitigating the impact of commodity price volatility.
• The company will continue to evaluate the nature and extent of potential impacts on its business.

Key Dates

Keywords

Hershey, confectionery, salty snacks, cocoa, commodity prices, net sales, gross margin, operating profit, net income, ERP system, supply chain, market share