The Hershey Co. (HSY, Financial) overcame supply chain disruptions and macroeconomic headwinds to report strong fiscal 2022 results, with a 16% year-over-year increase in revenue to $10.4 billion.
The company achieved a strong performance despite challenges from macroeconomic headwinds and supply chain bottlenecks. The North American confectionery market has significant potential for growth due to an increasing trend of per capita chocolate consumption, and Hershey has been implementing strategic measures to gain market share. Further, the North American salty snacks market is well positioned to capitalize on the growing demand for less sugary treats. Hershey's extensive distribution networks and marketing budget are advantageous in this regard.
Moreover, the international segment offers ample growth opportunities and actively explores potential markets. By expanding its global footprint, Hershey's can tap into new consumer markets and leverage its well-established brand recognition to drive growth.
Performing well despite external pressures
Despite the Russia-Ukraine conflict directly impacting Hershey's supply chain, the company has been able to maintain regular supplies without significant disruptions. Moreover, Hershey's sales appear have remained fairly unscathed by pandemics, inflation or international political conflicts.
The company has responded to the current challenges by limiting the number of products it offers and focusing on its most popular items. The strategy is paying off. Despite facing economic headwinds and supply chain issues, in the year's final quarter, the company reported a 14% increase in consolidated sales, reaching $2.65 billion, and an 18.5% increase in net income. Hershey's full-year sales reached $10.42 billion, a 16.1% increase from the previous year, while net income rose 12% to $1.64 billion.
Hershey's cash flow was also noteworthy, with cash from operations increasing from $1.6 billion in the previous fiscal year to $2.33 billion. In addition to the impressive growth of its traditional confectionery segment, the company experienced a substantial 85% increase in its salty snacks business, a critical segment for future growth.
The robust financial performance in 2022 demonstrates the company's resilience and agility in navigating challenging conditions. The growth in sales, net income, cash flow and expansion of its salty snacks business are a testament to Hershey's successful implementation of strategic measures to drive growth and maintain its market position.
North American sales can grow further
Snacking is a popular pastime among Americans, and Hershey's is the leading confectionery seller in the U.S., commanding a market share of around 24%, according to Statista. The total snack sales in the country exceeded $108 billion in 2022, with projections indicating that this figure will surpass $120 billion within the next five years. With its focus primarily on the domestic market, Hershey's stands to benefit significantly from this growing demand for snacks in the short and long term.
Hershey's North America Confectionery segment, which encompasses the chocolate and non-chocolate products in the U.S. and Canada, is the largest and most profitable business segment. This segment generated $8.5 billion in revenue, accounting for over 80% of the company's total revenue. It also contributed $2.8 billion in profits, accounting for 91% of segment profits, with a margin of 33%.
The North America Confectionery segment's prospects are promising, with significant potential for growth in both the U.S. and Canada, according to data from Statista. In Canada, chocolate consumption stands at around 5.6 kilograms per capita, leaving ample room for growth considering the significantly higher consumption rates in the U.S. In America, per capita, chocolate consumption lags behind Switzerland, the world's biggest chocolate consumers, with 9 kilograms per person compared to Switzerland's 11.6 kilograms.
The salty snacks business, which include Dot's Pretzels, Pirate's Booty and Skinny Pop, is the company's second-largest business segment in terms of revenue, profits and margins. In fiscal 2022, the segment generated $1.03 billion in revenue and $160 million in earnings and had a margin of 15.5%.
During the fourth quarter, the segment recorded significant net sales growth of 71.4% compared to the same period in 2021, amounting to $272 million. Furthermore, its segment margin grew by 840 basis points to 20.8%.
With more consumers seeking snacking options that are lower in sugar, the popularity of salty snacks is rising. Hershey's product portfolio is well positioned to capitalize on this trend. Grand View Research found the American savory snack market was estimated to be worth $36.89 billion in 2020. It is projected to grow at a compound annual rate of 6.1% from 2021 to 2028.
Moving forward, Hershey's North American businesses have the potential to gain further market share and increase revenue. The company's extensive distribution networks and massive marketing budget will likely benefit its brands. The brand could achieve meaningful revenue growth and gain a larger market share with expanded marketing and distribution activities.
Going global
Hershey's international segment, which is composed of its operations outside North America in countries like Brazil, Mexico, India and Malaysia, generated $853 million in revenue and $107 million in earnings and had a margin of 12.6%. While it is the company's smallest segment in terms of revenue, earnings and margins, it holds significant potential for growth. Forecasts indicate that global chocolate sales will grow in the low-to-mid-single digits, presenting opportunities for Hershey to expand its market share internationally.
Hershey strategically expands into markets with the highest growth potential. For example, in India, rising incomes and growing appetites are driving demand. As such, the company is expanding its product portfolio to meet this demand. While competition is stiff, with Mondelez India commanding a 65% market share as per Nielsen, Hershey's is betting on the size and growth of the Indian market to accommodate several players.
During the fourth quarter, Hershey's international sales amounted to almost $206 million, accounting for 11.1% of total revenue. While these numbers have grown considerably in recent years, they represent only a fraction of what the company can sell in different regions of the world. The company has invested significantly in existing factories overseas, such as in Mexico, to ramp up its production. Expanding its footprint in countries like China and India, where the company currently has a negligible market presence, will boost sales and profits as well as inspire investor confidence.
Premium valuation might deter investors despite good prospects and a decent dividend
Hershey pays decent dividends, making it a potentially attractive option for long-term investors. The company recently announced a dividend of $1.03 per share for the fourth quarter of 2022, resulting in an annual yield of 1.65%. Regardless, some investors may hesitate to invest in Hershey due to its high valuation relative to the industry.
Over the past 10 years, Hershey's price-earnings ratio has ranged from 18.52 to 44.29, with a median of 26.95. The ratio currently stands at 30.55, which is worse than 71.77% of companies in the consumer packaged goods industry according to GuruFocus. The industry median is 17.44, highlighting the premium investors pay for the stock.
While Hershey's has historically traded at a premium compared to its peers, its current valuation may deter some investors from buying the stock. Despite the high valuation, the company has grown its earnings and sales, driven by its dominance in the North American confectionery space, expansion in the salty snacks business and international growth potential.
Takeaway
The confectionery company has demonstrated its resilience during economic downturns and has proven its ability to overcome supply chain bottlenecks. As a result, Hershey has gained a reputation for being a reliable and stable investment option.
Furthermore, the positive news surrounding the confectioner has contributed to the current demand for its stock. Investors are encouraged by its continued growth and success in the face of challenges, which has increased confidence in its ability to weather future economic uncertainties.
The company's track record of overcoming obstacles and its positive reputation has made it a hot stock. It will likely remain a sought-after investment option for those seeking stability and growth potential. However, the premium valuation might deter value-oriented investors, keeping price momentum muted amid macroeconomic challenges.
