Group 1 - Citigroup downgraded Hershey Co (NYSE:HSY) from "neutral" to "sell" and reduced the price target from $195 to $182, citing cocoa inflation and volume challenges as potential negative impacts on earnings [1] - Hershey's stock was trading at $194.80, down 0.8%, and has experienced a 10.8% year-over-year deficit [1] - The stock's 50-day call/put volume ratio is 3.01, indicating that bullish bets are significantly more popular than usual, higher than 90% of readings from the past year [1] Group 2 - The current premium for Hershey stock is considered affordably priced, with a Schaeffer's Volatility Index (SVI) of 19%, which is in the low 24th percentile of annual readings [2]

Core Viewpoint - The Hershey Company has been downgraded from a bullish to a neutral rating due to declining net sales and a muted outlook for 2024, raising concerns about potential overvaluation [1][2]. Financial Information - For Q2 2024, Hershey reported revenue of $2.07 billion, which was $246.38 million below analyst expectations and represented a 16.7% decline year-over-year [4][6]. - Earnings per share (EPS) were $1.27, missing forecasts by $0.18 [4]. - The North America Confectionery segment, the largest for Hershey, experienced a significant decline in sales, contributing to the overall revenue drop [7][8]. Profitability - The gross margin decreased by 530 basis points, attributed to derivative mark-to-market losses, higher commodity costs, and fixed cost deleverage [13]. - Operating profit fell nearly 49% compared to the previous year, with the operating margin shrinking by 860 basis points [13]. Macroeconomic Environment - Poor consumer confidence and reduced discretionary spending have been identified as primary factors affecting Hershey's performance [9][10]. - Consumer sentiment in the U.S. has stagnated and trended downward, suggesting that demand for Hershey's products may not improve significantly in the near future [10]. Balance Sheet Insights - Accounts receivable have increased year-over-year, while sales have declined, indicating potential issues with credit sales and demand forecasting [12]. - Inventory levels are rising despite falling sales, which may lead to increased discounting and negatively impact profitability [12]. Valuation - Hershey's stock is trading at a significant premium compared to the consumer staples sector median, with a P/E Non-GAAP (TTM) of 21.95 versus the sector median of 18.35 [17]. - Despite the premium valuation, Hershey's multiples indicate it is selling at a discount compared to its historical valuation [18]. Dividend and Shareholder Returns - Hershey has a strong history of dividend payments, having paid dividends for over 34 years and committed to growing them for more than a decade [22][23].

Core Viewpoint - The Hershey Company is experiencing a challenging year with a significant stock pullback, but management's communication has helped stabilize investor sentiment despite a disappointing Q2 earnings report [1][2][10]. Financial Performance - In Q2 2024, Hershey reported net sales of approximately $2.07 billion, a 16.7% year-over-year decrease, with net income down 55.1% to $180.9 million or $0.89 per share [8][14]. - North America Confectionery sales fell by 20.7% to $1.58 billion, while North America Salty Snacks increased by 6.4% to $290 million, and International sales decreased by 8.9% to $205 million [8][14]. - The gross margin for Q2 was reported at 40.2%, down from 45.5% a year ago, indicating pressure on profitability [8][14]. Growth Outlook - Hershey's long-term outlook anticipates net sales growth of 2% to 4% and EPS growth between 6% to 8%, reflecting a stable but slow growth trajectory [5][12]. - The company has been focusing on its Salty Snacks division, which has shown significant growth, with SkinnyPop and Dot's Pretzels contributing over $860 million in retail sales [5][7]. Market Dynamics - Cocoa prices have been a significant factor affecting Hershey's stock performance, with recent declines in cocoa prices positively impacting investor sentiment despite the Q2 earnings miss [2][10]. - The company is sensitive to seasonal sales patterns, particularly around major holidays, which affected Q2 results due to the timing of Easter [10][11]. Shareholder Returns - Hershey increased its dividend by 15% at the end of Q1, maintaining a payout ratio below 50%, signaling confidence in future cash flow generation [2][11]. - The company has a TTM free cash flow of approximately $1.4 billion and has returned over $1 billion through dividends and share buybacks, indicating a commitment to returning value to shareholders [11][12]. Valuation Considerations - Hershey's stock is currently viewed as having a steep valuation with a PE ratio above 20, despite slow growth and existing headwinds [12][13]. - The company's ability to generate steady cash flows and its FCF yield of 4.7% provide some justification for its valuation, attracting long-term investors [12].

Core Viewpoint - The Hershey Company is experiencing significant financial weakness in Q2 2023, with a notable decline in revenue and operating income, despite its historically resilient performance and strong brand positioning in the industry [1][4][15] Financial Performance - Hershey's Q2 2023 report indicated a -16.7% revenue decline and a -48.7% decrease in operating income, marking the largest quarterly decline in at least a decade [4] - The company lowered its 2024 sales growth guidance from 2-3% to approximately 2% and adjusted earnings per share expectations to "down slightly" from a previously flat outlook [4] Historical Growth - From 2003 to 2023, Hershey has achieved a revenue CAGR of 5.0%, with stable operating margins reaching 22.7% in 2023, indicating strong long-term financial health [3] - The stock has appreciated at a CAGR of 7.8% over the past decade, with a current dividend yield of 2.79% [1] Headwinds - Key factors contributing to the Q2 decline include: - ERP implementation causing manufacturing and delivery disruptions, estimated to have contributed around 9 percentage points to the revenue decline [5] - Retailer inventory management issues, which had an estimated 7 percentage point adverse effect on sales [5] - Slowing food inflation, which decreased from a 6.4% CAGR from 2021 to 2023 to just 1.1% in July 2023, potentially impacting both revenue growth and margins [6] - Elevated cocoa prices due to poor weather conditions in West Africa, leading to a significant drop in gross margin to 40.2%, down 5.3 percentage points year-on-year [8] - Lower discretionary spending, although its impact on Q2 performance is considered less significant due to the defensive nature of the industry [9][10] Future Outlook - Despite current challenges, Hershey is expected to navigate through headwinds effectively due to its high margin levels and strong brand portfolio [11] - The company is projected to stabilize growth at a lower level than in previous years, with a revenue CAGR of 2.6% from 2023 to 2033 [12] - The fair value estimate for Hershey's stock is $232.19, indicating a 20% upside from the current stock price, suggesting potential undervaluation [13] Valuation - Hershey's valuation is comparable to industry peers, with a forward EV/EBITDA of 14.8, indicating a fair valuation amidst current headwinds [13]

Core Viewpoint - Hershey is facing challenges due to high cocoa prices but remains a profitable company with a strong dividend yield, making it an attractive investment opportunity. Group 1: Financial Performance - Hershey has increased its quarterly dividend by 77% over the last five years and currently offers a forward dividend yield of 2.75%, the highest in five years [1][4][5] - The company reported a net profit of $1.8 billion on $11 billion of revenue over the last four quarters, translating to adjusted earnings per share of $8.96 [4][5] - Despite a year-over-year sales decrease of 16% in the second quarter, the base business saw a low-single-digit decline in sales, with international sales up mid-single digits [2] Group 2: Market Outlook - The confectionery market is estimated to be worth $133 billion and is expected to grow at a compound annual rate of nearly 5% through 2029, providing a favorable environment for Hershey [3] - Hershey's management expects full-year sales to increase approximately 2%, with new product launches for Halloween and the holiday season anticipated to boost sales [2] Group 3: Strategic Positioning - Hershey owns several top brands, including Cadbury, Reese's, Twizzlers, KitKat, and Jolly Rancher, which helps in building relationships with retailers and driving higher sales [3] - The company sees underdeveloped sales channels like e-commerce as an opportunity for growth [2]

Core Insights - Hershey continues to lead in Halloween-themed products, introducing innovative flavors and returning favorites to enhance consumer engagement during the festive season [1][4]. New Products and Innovative Delights - Kit Kat® Ghost Toast features a new cinnamon toast flavored creme, available in various sizes for a limited time [2]. - Reese's Werewolf Tracks combines vanilla-flavored creme, milk chocolate, and peanut butter, offered in multiple sizes [2]. - Special edition Hershey's Milk Chocolate Harry Potter™ Bars feature engravings of Hogwarts houses, available in 9.45 oz bags [2]. - Twizzlers Ghosts are introduced as the first Halloween shape, available in 8.5 oz bags [2]. - Halloween-themed SkinnyPop and Pirate's Booty snacks are available, with 79% of Halloween shoppers planning to purchase salty snacks this season [3]. Returning Favorites - Reese's Pumpkins and Reese's Skeletons are back, available in various sizes for sharing and trick-or-treating [3]. - Hershey's Harry Potter™ Kisses are available in limited-edition bags and new canes, featuring whimsical foils [3]. - Chocolate & Sweets Assortments include HARIBO® Goldbears® in Hershey assortment bags, catering to diverse consumer preferences [3]. Company Overview - The Hershey Company generates over $11.2 billion in annual revenues, employing more than 20,000 people globally [5]. - Hershey's product portfolio includes over 90 brand names across approximately 80 countries, emphasizing a commitment to quality and sustainability [5].

Core Insights - Hershey has reduced its yearly profit and sales guidance following a 17% decline in second-quarter sales, reflecting a broader trend of consumer pullback amid persistent inflation [1][2] - The company's stock initially dropped 4.5% but later rebounded by 5% [1] - Hershey's market capitalization stands at $38.83 billion, and it has historically maintained or grown its market share during economic downturns [1] Financial Performance - Second-quarter net sales decreased to $2.07 billion, falling short of analysts' expectations of $2.31 billion [2] - North America segment sales, which typically account for 80% of revenue, fell to $1.58 billion from $1.99 billion year-over-year [2] - Adjusted earnings per share dropped to $1.27, a 36.8% decline from the previous year, and below the expected $1.43 [2] - Organic volume saw an 18% decrease, while gross margin fell to 40.2%, down from 45.5% the previous year [2] Guidance and Market Trends - The company now anticipates a sales growth of 2%, revised down from a previous estimate of 2% to 3% [3] - Adjusted earnings per share are expected to experience a slight decline, contrasting with earlier expectations of no change [3] - CEO Michele Buck noted the impact of cautious consumer spending but highlighted growth in the confection category and momentum in the Salty Snacks portfolio [3] Segment Performance - The North America Salty Snacks segment reported net sales of $289.9 million, a 6.4% increase from the previous year, attributed to volume growth [4] - Salty snack segment income rose to $52.2 million, up 19.2% year-over-year [4] - Conversely, the North America Confectionery segment experienced a 20.7% decline in net sales, with income down 29.3% from the same period last year, totaling $464.5 million [4]

Core Viewpoint - The Hershey Company reported disappointing second-quarter 2024 results, with both earnings and net sales declining year over year, missing consensus estimates, and management has lowered its sales and earnings guidance for 2024 [1][2][8] Financial Performance - Adjusted earnings were $1.27, down 36.8% year over year, missing the Zacks Consensus Estimate of $1.44 [2] - Consolidated net sales were $2,074.5 million, a decline of 16.7% from the previous year, also missing the consensus estimate of $2,297.5 million [2] - On a constant-currency basis, organic sales fell by 16.8%, primarily due to reductions in retailer inventory in North America and international markets [2] - Adjusted gross margin contracted to 43.2%, down 200 basis points year over year, mainly due to higher commodity costs [2] Operating Expenses - Selling, marketing, and administrative expenses decreased by 5.4% year over year, primarily due to lower marketing expenses [3] - Adjusted operating profit was $383.5 million, down 32.8% year over year, with the operating profit margin contracting 440 basis points to 18.5% [3] Segment Performance - North America Confectionery segment net sales fell 20.7% year over year to $1,579.8 million, attributed to planned inventory reductions and shifts in shipment timing [4] - The North America Salty Snacks segment saw net sales rise 6.4% to $289.9 million, driven by volume growth despite unfavorable price realization [4][5] - International segment net sales dropped 8.9% year over year to $204.8 million, with organic sales declining 10.4% [6] Guidance and Future Outlook - Management now expects approximately 2% year-over-year net sales growth for 2024, down from the previous range of 2-3% [8] - Adjusted earnings per share are projected to decline slightly to a range of $9.49-$9.59, compared to the earlier forecast of no change year over year [8] - Capital expenditure is expected to be between $600-$625 million for 2024, focusing on core confection capacity expansion and digital infrastructure investments [7]

Financial Data and Key Metrics - The company experienced a 6% impact from lower retail inventory and a 2% to 3% impact from the Halloween shift in North American Confectionery [9] - The company expects to achieve 6 to 7 points of net price realization from recent pricing actions [13] - Gross margin is expected to decline by 200 basis points for the full year, with some input cost timing favorability in Q2 [27][28] Business Line Data and Key Metrics - North American Confectionery saw weaker market share trends in core chocolate, particularly in everyday items, with pressure in the C-store channel and an uptick in take-home and club stores [16][18] - The company expects stronger performance in the second half due to innovation, seasonal programming, and lapping retailer merch reductions [17][19] - Salty snacks, particularly Dot's and SkinnyPop, are showing strong trends, with Dot's benefiting from distribution expansion and SkinnyPop expected to regain momentum in the back half [40][61][62] Market Data and Key Metrics - Consumers are shifting spending away from convenience stores to mass and dollar stores due to discretionary spending pullbacks [43][44] - The company expects historic elasticity levels (around 1) for the recent price increase in North American Confectionery [45][46] Company Strategy and Industry Competition - The company is taking a measured approach to pricing, focusing on passing on some inflation while maintaining category rationality [12][13] - Innovation, particularly in sweets with the Shaq launch, and seasonal programming are key drivers for the back half [19][40] - The company is leveraging cost reduction, productivity, and formulation changes to manage cocoa price volatility [50][74] Management Commentary on Operating Environment and Future Outlook - Management is confident in the back half due to strong visibility into seasonal orders, retailer collaboration, and innovation [10][19] - Cocoa prices are expected to remain elevated, necessitating price increases, but the company is monitoring the market for future adjustments [12][49][51] - The company is focused on optimizing reinvestment and offering value through price points, innovation, and promotional activities [31][32] Other Important Information - The company completed its S/4 ERP implementation, which is foundational for its transformation program and cost savings initiatives [86] - Marketing support is expected to remain in line with sales growth for both 2024 and 2025 [57][58] Q&A Session Summary Question: Impact of lower retail inventory and Halloween shift on North American Confectionery [9] - Answer: The company views the inventory adjustments as a reversion to traditional order patterns, with strong visibility into seasonal orders and no material impact expected for the year [10] Question: Details on recent pricing actions [11] - Answer: The pricing covers select products, with a 6-7% net price realization expected, and the company is assuming historic elasticity levels [12][13] Question: Market share trends in core chocolate [16] - Answer: Share losses were driven by weaker C-store trends and reduced retailer merch, but the company expects improvement in the back half due to innovation and seasonal programming [17][18][19] Question: Consumer receptivity to price increases [29] - Answer: The company is taking a surgical approach to pricing, focusing on key price points and optimizing reinvestment to maintain value for consumers [30][31][32] Question: Cocoa price coverage and gross margin outlook [33][34] - Answer: The company is largely locked in on cocoa for 2024 but is monitoring the market for 2025, with gross margin expected to face headwinds from commodity inflation and seasonal mix [34][53][54] Question: Marketing support and portfolio optimization [57][69] - Answer: Marketing support will remain in line with sales growth, and the company is focused on optimizing its portfolio to meet consumer needs, including expanding into salty snacks [57][70] Question: Long-term growth initiatives [85] - Answer: The company is making progress on its transformation program, including digital and workforce planning, despite the volatile environment [86]

Financial Performance - Net sales for Q2 2024 were $2,074.5 million, a decrease of 16.7% from $2,490.3 million in Q2 2023, primarily due to an 18% volume decline [153]. - Gross profit decreased to $833.8 million in Q2 2024, down 26.4% from $1,132.1 million in Q2 2023, with a gross margin of 40.2% compared to 45.5% in the prior year [153]. - Operating profit fell to $287.9 million in Q2 2024, a decrease of 48.7% from $560.6 million in Q2 2023, resulting in an operating profit margin of 13.9% [161]. - Net income for Q2 2024 was $180.9 million, down 55.6% from $406.9 million in Q2 2023, with diluted net income per share of $0.89 compared to $1.98 [153]. - Net sales for the first six months of 2024 were $5,327.2 million, down $150.7 million or 2.8% from $5,477.9 million in the same period of 2023, primarily due to a volume decrease of approximately 6% [166]. - Operating profit for the first six months of 2024 was $1,345.9 million, a decrease of $14.7 million or 1.1% compared to $1,360.6 million in the same period of 2023, with operating profit margin increasing to 25.3% [171]. - Net income was $978.3 million in the first six months of 2024, a decrease of $15.9 million, or 1.6%, compared to $994.2 million in the same period of 2023 [175]. Tax and Expenses - The effective income tax rate increased to 26.4% in Q2 2024 from 7.4% in Q2 2023, influenced by state taxes and tax reserves [164]. - Selling, marketing, and administrative expenses decreased by 5.4% to $541.0 million in Q2 2024, with a notable 15.4% reduction in advertising expenses [159]. - Net interest expense rose to $81.2 million in the first six months of 2024, an increase of $6.9 million or 9.2% compared to $74.3 million in the same period of 2023, due to higher rates on short-term and long-term debt [172]. - Unallocated corporate expense decreased by $29.3 million, or 8.1%, to $334.4 million in the first six months of 2024, primarily due to lower acquisition and integration-related costs [194]. Segment Performance - North America Confectionery segment net sales were $1,579.8 million in Q2 2024, down $413.3 million or 20.7% from $1,993.1 million in Q2 2023, primarily due to volume declines [180]. - North America Salty Snacks segment net sales increased by $22.6 million, or 4.2%, to $565.0 million in the first six months of 2024, reflecting volume growth of approximately 5% [187]. - International segment net sales decreased by $15.2 million, or 3.1%, to $475.1 million in the first six months of 2024, driven by volume declines of approximately 10% [192]. - Total segment income for the first six months of 2024 was $1,571.4 million, a decrease of $160.2 million or 9.2% compared to $1,731.6 million in the same period of 2023 [176]. Cash Flow and Capital Expenditures - Cash and cash equivalents totaled $467.1 million at June 30, 2024, an increase of $65.1 million compared to the 2023 year-end balance [195]. - Operating activities generated cash of $894.7 million in the first six months of 2024, a decrease of $155.1 million compared to $1,049.8 million in the same period of 2023 [199]. - Capital expenditures were $343.5 million in the first six months of 2024, an increase from $330.5 million in the same period of 2023, with expectations for 2024 capital expenditures to approximate $600 million to $625 million [201]. Shareholder Activities - Total dividend payments increased to $543.9 million in the first six months of 2024, an increase of $130.4 million compared to $413.5 million in the same period of 2023 [203]. - The company repurchased shares worth $494.2 million in the first six months of 2024, compared to $239.9 million in the same period of 2023 [206]. - The company completed a $500 million share repurchase authorization in March 2024, with approximately $470 million remaining under the new December 2023 authorization [208]. Market Conditions and Risks - Cocoa product prices increased approximately 75% since the beginning of 2024, contributing to gross margin pressures [149]. - The ongoing conflict between Russia and Ukraine has not materially impacted commodity prices or supply availability as of June 30, 2024 [150]. - The company is subject to various risks including supply chain disruptions, increased raw material costs, and competition, which could impact future financial results [213]. - The company anticipates that market demand for new and existing products may decline, affecting overall business performance [214].