8-K: Hershey's Q3 2024 Results: Sales Dip, Outlook Lowered Amidst High Cocoa Costs

Hershey's third-quarter results show a slight sales decrease and a reduced full-year outlook due to high cocoa prices and a challenging consumer environment.

Summary

• Hershey's net sales for the third quarter of 2024 decreased by 1.4% to $2,987.5 million.
• Organic, constant currency net sales also saw a decrease of 1.0%.
• Reported net income for the quarter was $446.3 million, or $2.20 per diluted share, a decrease of 12.7%.
• Adjusted earnings per diluted share were $2.34, a decrease of 10.0%.
• The company has reduced its full-year net sales growth outlook to flat, down from a previous estimate of approximately 2%.
• Full-year reported earnings per share growth is now projected to be between -9% and -6%, down from -3% to -1%.
• Adjusted earnings per share growth is expected to be down mid-single-digits, compared to a previous outlook of down slightly.
• The company anticipates approximately $260 million to $270 million in other expenses, primarily due to the write-down of equity investments.
• Interest expenses are projected to be around $170 million due to a higher interest rate environment.
• Capital expenditures are estimated to be between $575 million and $600 million, driven by capacity expansion and digital infrastructure investments.
• The Advancing Agility & Automation Initiative is expected to yield savings of approximately $100 million.

Sentiment

Score: 3

Explanation: The sentiment is negative due to decreased sales, lowered guidance, and margin compression, indicating significant challenges for the company.

Positives

• The company is focused on controlling costs and delivering value to stakeholders.
• The Advancing Agility & Automation Initiative is expected to generate savings of approximately $100 million.
• The company is investing in core confection capacity expansion and digital infrastructure.
• The North America Confectionery segment saw a slight increase in net sales of 0.8%.
• The company is seeing growth in Europe and Latin America within the International segment.
• The company's U.S. salty snack retail takeaway increased 2.8% for the 12-week period ended September 29, 2024.
• Dots Homestyle Pretzels retail sales increased 31.1% in the quarter.

Negatives

• Net sales decreased by 1.4% in the third quarter.
• Organic, constant currency net sales decreased by 1.0%.
• Reported net income decreased by 12.7%.
• Adjusted earnings per share decreased by 10.0%.
• The full-year net sales growth outlook has been reduced to flat.
• The full-year reported earnings per share growth outlook has been lowered to -9% to -6%.
• Adjusted earnings per share growth is expected to be down mid-single-digits.
• Gross margin decreased by 360 basis points to 41.3%.
• Adjusted gross margin decreased by 460 basis points to 40.3%.
• North America Salty Snacks segment net sales decreased by 15.5%.
• International segment net sales decreased by 3.9%.
• Hershey's U.S. candy, mint and gum (CMG) retail takeaway decreased 2.6% for the 12-week period ended September 29, 2024.
• Hershey's CMG share declined 97 basis points compared to the prior year.
• SkinnyPop ready-to-eat popcorn takeaway declined 5.5%.

Risks

• The company is facing challenges due to historically high cocoa prices.
• There is a challenging consumer environment impacting sales.
• The company is experiencing volume declines across segments.
• There is increased competitive activity in Brazil.
• The company is facing ongoing market softness in Mexico.
• The company is experiencing execution-driven shipment delays into the fourth quarter.
• There are retailer inventory reductions impacting sales.
• The company is experiencing higher commodity costs, unfavorable input cost timing, and fixed cost deleverage.
• There are potential complications with the design, implementation or usage of the new enterprise resource planning system.

Future Outlook

The company has reduced its full-year net sales growth outlook to flat and lowered its earnings per share growth outlook to down mid-single-digits, reflecting challenges from high cocoa prices and a difficult consumer environment.

Management Comments

• We believe in the resiliency of our snacking categories and the strength of our brands, said Michele Buck, The Hershey Company President and Chief Executive Officer.
• While year-to-date results have been affected by historically high cocoa prices and a challenging consumer environment, we are laser-focused on controlling what we can and are acting with immediacy to deliver value to customers, consumers and shareholders.
• Our priorities are to drive top-line and market share growth by winning in-store with key customers, expanding our chocolate portfolio, accelerating sweets, and maximizing our seasonal strength.

Industry Context

The results reflect broader industry challenges related to rising commodity costs, particularly cocoa, and a softening consumer environment, impacting companies in the food and beverage sector. Hershey's is also facing increased competition in some international markets.

Comparison to Industry Standards

• Hershey's performance is below the average for large cap consumer staples companies, many of which have been able to pass on cost increases to consumers.
• Companies like Mondelez and Nestle have shown more resilience in their international segments, while Hershey's international segment is facing challenges.
• The decline in Hershey's gross margin is more pronounced than some of its peers, indicating a greater impact from commodity costs.
• The reduction in full-year guidance is a negative signal compared to companies that have maintained or slightly lowered their outlooks.
• Hershey's salty snacks segment is underperforming compared to other snack food companies that have seen growth in the same period.

Stakeholder Impact

• Shareholders will be negatively impacted by the reduced earnings outlook and share price decline.
• Employees may be affected by cost-cutting measures and restructuring.
• Customers may see price increases or changes in product availability.
• Suppliers may face pressure due to cost-cutting initiatives.

Next Steps

• The company will continue to focus on driving top-line and market share growth.
• The company will expand its chocolate portfolio and accelerate its sweets business.
• The company will maximize its seasonal strength.
• The company will continue to implement the Advancing Agility & Automation Initiative to generate cost savings.

Key Dates

Keywords

Hershey, Confectionery, Salty Snacks, Net Sales, Earnings, Cocoa Prices, Gross Margin, Operating Profit, Financial Results, Snacking