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The Hershey Co HSY

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Morningstar’s Analysis

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Higher Seasonal Sales Gives Hershey a Solid End to a Volatile 2020; Investors Shouldn't Indulge

Erin Lash, CFA Sector Director

Analyst Note

| Erin Lash, CFA |

Hershey’s fourth-quarter performance is evidence that the resiliency it showed in the all-important Halloween season wasn’t a fluke. In the last three months of a turbulent fiscal 2020, the wide-moat confectionery operator chalked up 6.3% organic sales growth, 50 basis points of adjusted gross margin gains to 43.9%, and 170 basis points of adjusted operating margin improvement (despite increasing advertising spending of nearly 10% on its home turf in the period). This growth was bolstered by a winning lineup of holiday fare, as Hershey’s seasonal offerings boasted growth of almost 5% in the fourth quarter, far outpacing the less than 1% uptick recorded for the overall category and resulting in share gains of more than 100 basis points. And we don’t think management is keen to take its foot off the gas now, with a full slate of new products scheduled to hit shelves over the course of 2021 (including Kit Kat Thins and organic Reese’s), and an appetite to elevate advertising spending. Taken together, this aligns with our outlook for research, development, and marketing to average around 8% of sales annually (about $700 million) as a means to ensure it remains entrenched with its retail partners and that its brands stand out at the shelf (both brick-and-mortar and e-commerce). 

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Company Profile

Business Description

Hershey is a leading confectionery manufacturer in the U.S. (nearly a $25 billion market), controlling around 45% of the domestic chocolate space (per IRI). Beyond its namesake label, the firm's mix has expanded over the last 85 years and now consists of more than 80 brands, including Reese's, Kit Kat, Kisses, and Ice Breakers. Hershey's products are sold in about 85 countries, with just 10% of total sales coming from markets outside the U.S., including Brazil, China, India, and Mexico. The firm has sought inorganic opportunities to extend its reach beyond its core confection business, adding Amplify Snack Brands and its Skinny Pop ready-to-eat popcorn to its mix and Pirate Brands (including the Pirate’s Booty, Smart Puffs, and Original Tings brands) over the past few years.

Contact
19 East Chocolate Avenue
Hershey, PA, 17033
T +1 717 534-4200
Sector Consumer Defensive
Industry Confectioners
Most Recent Earnings Dec 31, 2020
Fiscal Year End Dec 31, 2020
Stock Type Classic Growth
Employees 16,880

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