What to Think About Hershey’s Semi-Sweet Earnings?

Hershey’s (NYSE: HSY) illustrates the fascinating part of being an investor in 2020. The company posted mixed earnings (beat on earnings, missed slightly on revenue). The company pointed out that overall sales volume declined by 7%. And yet HSY stock is up over 5% in afternoon trading. If the stock holds on to its current gains it will turn positive for the year and have recovered most of its pandemic-induced loss.

Wow, talk about a sugar high.

There were things to like in the report. Adjusted operating profit increased 4.4% in the second quarter, resulting in a 170-basis-point improvement to operating profit margin on a year-over-year (YoY) basis.

However, heading into the earnings report, it sounded like investors were expecting more. They didn’t get that, but are driving the stock forward anyway. Interesting.                                                                                                                                          

If I have to assign a reason it’s that the company believes the worst may be over. Hershey’s chief executive officer (CEO) Michele Buck said the company expects accelerated sales growth in the second half of the year “assuming no significant disruption to current consumer trends.”

Fair enough. However, Hershey’s declined to issue forward guidance for the rest of 2020 so it’s hard to gauge how confident the company is that there won’t be a disruption.

Hershey’s continues to dominate the U.S. market

Contrary to my tone, I like Hershey’s stock. I’m a believer in understanding what you’re investing in and Hershey is that. And like I said there were things to like in the report.

Despite declining overall sales volume, Hershey’s continued to gain market share. And that growth included the important baking niche. That stands to reason. In April, flour started becoming about as valuable as toilet paper in some regions of the country.

And Hershey’s has long dominated the U.S. market, which is also seen as one of the company’s greatest weaknesses.

The company offers additional sweeteners

On July 21, Pennsylvania Governor Tom Wolf announced that the commonwealth was partnering with Hershey to build a world-class fulfillment center that would create 270 new, full-time jobs. The 810,000 square-foot center will support Hershey’s manufacturing plants and existing distribution center in Palmyra. The center is expected to be operational late next year.

 “The Hershey Company has a rich history here in the commonwealth, which will continue to grow with the construction of this new fulfillment center,” said Gov. Wolf. “This project will continue the company’s efforts to provide stable, competitive and gainful employment in Pennsylvania.”

And Hershey also announced a dividend increase, boosting the company’s annual dividend to $3.20. The increase makes it 10 consecutive years of increasing the dividend.

No Halloween doesn’t mean no candy

Although Hershey’s didn’t issue forward guidance for the rest of 2020, Buck did not avoid one scary elephant in the room. In prepared remarks, Buck said the company was cautiously optimistic that Halloween will be celebrated this year in a traditional fashion.

The importance of Halloween is hard to understate, seeing that it accounts for approximately 10% of Hershey revenue. I would have thought it would be more, but that’s still a big number.

Buck made an important point in pointing out that about 50% of the company’s Halloween sales are actually for what Buck termed “treat for me” and “candy bowl” occasions. These usually start much earlier than Halloween itself. I will neither confirm nor deny that this is true in my house. But let’s just say that I agree with Buck.

As for the actual event itself, I’m not as negative about the impact on Hershey sales. My children are past the age of trick or treating, but I imagine if I was a parent facing the possibility of not having that option, it wouldn’t mean my kids would get less candy (truth be told they’d probably get more).

Parents being the resilient bunch that most are, I imagine there will be several creative and fun ways for kids to acquire candy on Halloween.

All of which is to say, I’m not that worried about candy sales. They may be down, but I’m not sure if it will be a dramatic shift. 

The bottom line on Hershey stock

Hershey’s has a strong balance sheet, and that is evidenced by its commitment to a growing dividend and its commitment to a major infrastructure project like the fulfillment center. Investors expecting the company to be operating with business, as usual, will be disappointed. There are too many commercial markets (e.g. food service) that are not available to the company. And the novel coronavirus is making it difficult for Hershey’s to get the International growth they need.

But people will still buy chocolate. And by the looks of it, they’re still buying Hershey’s chocolate. With a P/E ratio of over 27, the stock is not cheap. And it’s unlikely to test its high of $160 per share anytime soon. But holding the stock gets you a reliable, safe dividend for your trouble. And you’ll likely get some growth when the pandemic finally ends.