Hershey cheered investors yesterday (2 February) with a set of strong 2010 numbers, which included an 18% increase in annual profits, quickening sales growth in the fourth quarter and an altogether confident outlook about the year ahead.
The US confectioner’s stock closed up more than 2% as Wall Street was impressed with A, B and C. One analyst remarked upon Hershey’s “resurgence” in recent years and, certainly, there has been a marked improvement in the company’s performance on a number of metrics since current president and CEO Dave West took the helm in late 2007.
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The last three to four years have seen Hershey significantly revamp its business. It has restructured its supply chain, which has seen factories in the US close and some manufacturing relocated abroad and, last year, it embarked upon “Project Next Century”, which focused on ending production at its original plant, built in 1905.
As such, it is difficult to make too draw comparisons on Hershey’s profit performance since West took charge; often the company’s bottom line is clouded by restructuring costs. However, one senses that Hershey’s brand building, innovation and marketing has all improved, particularly in recent years and the company is reaping the benefits of that work. The signs had already emerged before yesterday but the figures confirmed them.
Admittedly, the resilience of confectionery is helping candy makers like Hershey. Strong category growth helped Hershey’s US sales and the company expects it to continue at around the historical level of 3-4%. Nevertheless, Hershey has upped its advertising expenditure – West said yesterday that spending on ads had tripled since 2006 – and, as Sanford Bernstein analyst Alexia Howard pointed out, there have been improved performances from Hershey in key parts of the US retail sector, notably the drugstore channel. That said, Hershey does face some stiff competition in the US, notably from Mars Inc-Wrigley and Kraft Foods and Cadbury, which will be another year forward as a combined business.
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In emerging markets, which, according to Howard, account for just around 9% of Hershey’s sales, the company is making progress. Speaking to analysts yesterday, West declined to give a specific figure for how much Hershey’s international sales grew in 2010 – he said that organic sales growth from that part of the business had been “in the range” of the compound annual growth rate of 14% seen “in the last few years”.
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By GlobalDataHowever, West said Hershey had continued to invest in initiatives around brand building and distribution overseas. He also pointed to the creation of two global strategic business units – one focusing on chocolate and the other on sugar confectionery – that, he said, will drive Hershey’s international business forward.
“Starting in June 2008, when we talked about our long-term growth strategy, we talked about international growth as being additive to our growth in the US. We’ve certainly put our money where our mouth is with respect to organic growth in the last couple of years,” West said.
Howard, for one, believes Hershey’s growth outside the US will continue at the current rate. “Management has planned double-digit increases in investment in a few key emerging markets (i.e. China) in FY11 as it ramps up on distribution, sampling, and brand support, which could help high-teen growth rates in these markets to continue. We expect emerging markets to add circa 150 basis points to sales growth in FY11,” she wrote in a note to clients yesterday.
However, it is on its international strategy that Hershey still has much to ponder. Hershey grabbed some headlines in the UK just before Christmas when it said that Asda, the country’s second-largest retailer and local arm of Wal-Mart Stores, would sell its products on an exclusive basis this year. One analyst said the UK partnership “did not sound that big”. Such arrangements are, as West admitted “opportunistic”, and are in tandem with retail partners like Wal-Mart in markets like the UK.
West, however, placed more emphasis on Hershey’s moves in a second batch of markets like South Korea or in the Middle East, where it works with a distribution partner. Moreover, West noted where Hershey has made its most significant strides and actually built a physical “infrastructure” – markets like Mexico, India and China. Those markets, West insisted, give Hershey “significant opportunity”. Despite the growth in overall international sales, Hershey has had some teething troubles; in July, it recorded an impairment charge of more than $44m on its Godrej Hershey venture in India.
Internationally, the perennial question for Hershey remains: will the company make a serious acquisition outside the US? The question was brought into sharp relief at the back end of 2009 when it admitted possible interest in bidding for Cadbury, which was eventually bought by Kraft.
Christian Walter, the head of rival confectioner Ferrero’s UK business, recently told just-food that “there are not a lot of big companies left”. However, further consolidation in the confectionery industry is expected; it is just that family-owned Ferrero’s conservative nature may preclude the Kinder maker from major acquisitions. Hershey has a similar issue with its shareholding structure dominated by The Hershey Trust but the company has, as many analysts yesterday alluded to, the balance sheet to be active on M&A and could decide to get the chequebook out, even if for smaller deals.
At the end of 2010, Hershey’s cash-on-hand stood at $885m. CFO Bert Alfonso was coy about how the company planned to use the cash on its balance sheet but admitted the business was “in a strong position from a cash perspective” and added: “We said in the past that M&A particularly, on a bolt-on basis, is interesting for us and something that we’re spending more time on.”
Hershey plans to divulge more details of its international plans at the annual CAGNY analyst conference later this month. And analysts will also be keen to hear more about how Hershey is dealing with volatility in commodity costs, a key concern for food manufacturers the world over right now.
Hershey was able to increase its prices in 2008 and demand remained relatively inelastic. Will Hershey be able to do so again? How will its competitors react to commodity cost pressure?
Looking ahead to the rest of the year, Howard said she expects “solid growth” from the company’s operations in North America and overseas but added: “Rising cocoa prices look set to put significant pressure on margins looking into FY11. It appears as though Mars is now taking prices up in the category by circa 6-7%, and we expect Hershey will soon follow its lead to cover the rise in underlying input costs, which could put pressure on volumes over the next year.”
After a solid 2010, Hershey has much to be happy about – but also much to ponder in the year ahead.
