Hershey: ‘Historic’ Cocoa Prices Will Limit FY 2024 Earnings Growth

The Hershey Company today reported Q4 net sales grew a modest 0.2% year-over-year to $2.65 billion, reflecting inflationary headwinds such as rising cocoa and sugar prices, which are expected to continue constraining earnings growth in the year to come.

Here’s a brief overview of the numbers:

• Organic, constant currency net sales for the quarter ended December 31 fell 0.1%
• Operating profit was $464.3 million and net income was $349 million, or $1.70 per share diluted, a year-over-year decrease of 11.5%.
• Reported net income decreased 11.5% to $349 million, or $1.70 per share-diluted.

“We continue to operate in a dynamic environment, but we are encouraged by the resilience of seasonal traditions and the consumer response to innovation within our categories,” said Michele Buck, Hershey president and CEO, in a prepared statement. “While historic cocoa prices are expected to limit earnings growth this year, we believe our strong marketing plans, innovation and brand investments will drive top-line growth.”

The company’s Salty Snacks segment (comprised of Dot’s Pretzels, Skinny Pop, Pirate’s Booty and more) generated $205.2 million in sales – a sizeable 24.6% decrease – driven by a volume slide (-26.1%) reflecting a 16-point headwind from planned inventory declines related to ERP implementation.

The segment’s sales growth in MULO plus-convenience was down 7%, with SkinnyPop’s sales dropping 12.9% due to “continued softness” in the popcorn category and planned reductions in the advertising and merchandising tied to the ERP upgrade. However, Dot’s Homestyle Pretzels saw a boost of 6.8%, resulting in a 44 basis point share gain in the category.

During today’s earnings call, Buck told investors she expects the segment lapse to continue through the first five months of 2024 before “rebounding to nice growth” and market share gains in the back half.

“We have made some improvements in the value proposition, introduced a value size of a bigger pack, sharpened some of our merchandising price points and also increased merchandising,” said Buck. “And we are back to a much heavier investment in advertising and innovation.”

Elsewhere, sales of Hershey’s North America confectionery division were up 2.1% in the quarter, around $2.2 billion, with its candy, mint and gum retail sales climbing 3.6%. Organic, constant currency net sales also increased 2.1%, as 7.2 points of net price realization was partially offset by volume declines related to price elasticity in everyday candy.

Looking ahead, the parent company of Reese’s and Skinny Pop expects FY 2024 net sales growth of 2% to 3%, primarily driven by net price realization. Meanwhile, both reported and adjusted earnings per share are projected to be flat as a result of higher sugar and cocoa prices and one-time expenses related to the Q2 ERP implementation.

Executives declined to comment in response to a question regarding whether future price hikes are being planned to offset the costs related to the “historic” cocoa prices.

Buck remains confident the second half of FY 2024 will begin to see more benefits from continuous improvements in manufacturing cost savings as well as the implementation of Hershey’s agility and automation program, telling investors there will be “less drag than in the first half.”

Last week, Hershey’s Board of Directors approved a multi-year productivity initiative to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and generate long-term savings. As part of the plan, the parent company of Reese’s and Pirate’s Booty will cut an undisclosed amount of jobs. Currently, Hershey employs approximately 21,000 individuals worldwide.

The company anticipates that the program will result in total pre-tax costs of $200 million to $250 million from inception through 2026. At the conclusion of the initiative in 2026, ongoing annual savings are expected to be roughly $300 million.