Headwinds Are Piling Against Hershey

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]