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).