EUR 850.00 For Business Accounts Only

Morningstar | Despite a Sluggish End to 2018, We Posit Hershey Is Prudently Working to Shore Up Its Edge

Even though it faces competitive and macro pressures, we believe Hershey is prudently investing to enhance its long-term competitive edge. Hershey’s dominance in the U.S. confectionery space is undeniable; the firm holds about a 45% share of the chocolate aisle, versus just a 1% share for private label. But more so, we applaud the strategic focus CEO Michele Buck has brought to bear since taking the helm two years ago--ramping up investments behind its core domestic brands while pulling back international spending. Further, we think actions to rightsize its brand mix on its home turf (incorporating the learnings from similar steps taken abroad of late) should lead to improving revenue and profits despite a near-term sales hit. In our view, these efforts should ultimately enable Hershey to more effectively focus its resources, both financial and personnel, on the highest-return opportunities, ultimately supporting the brand intangible assets that form the linchpin of our wide moat rating while also taking complexity (and costs) out of its business, which we view as prudent.The firm isn't resting on its laurels but is investing to bring new products to market, such as "hand to mouth" offerings, to differentiate its fare from the competition. And because consumers are opting to shop the perimeter of the store at the expense of center-store categories, Hershey is working to ensure its products are in front of consumers. These efforts support our contention that Hershey is poised to drive accelerating sales growth over time and sustain its solid competitive position on its home turf.And in light of persistent headwinds, we view proactive steps to extract $150 million-$175 million in costs (a low- to mid-single-digit level of cost of goods sold and operating expenses) to fuel added brand spend and enhance profits positively. We anticipate about half of these savings will ensue from the firm’s loss-making international operations, particularly as it bolsters capacity utilization outside the U.S.--which has stood at a mere 40% (far below the 65% of its U.S. operations)--and rationalizes its stock-keeping units, or SKUs, to focus on its higher-margin megabrands.