Company Overview
The Hershey Company, a global leader in the confectionery industry, has built a remarkable legacy spanning over a century. Founded in 1894 by Milton Hershey, the company has evolved from a small chocolate manufacturer to a diversified snacking powerhouse, with a portfolio of beloved brands that have become household names.
Financials
In 2023, Hershey reported annual net income of $1.86 billion and annual revenue of $11.16 billion. The company's annual operating cash flow stood at $2.32 billion, while its annual free cash flow reached $1.55 billion. These impressive financial metrics underscore Hershey's ability to generate consistent and substantial cash flows, a testament to the strength and resilience of its business model.
In the most recent quarter (Q3 2024), Hershey reported revenue of $2.99 billion, net income of $446.30 million, operating cash flow of $695.25 million, and free cash flow of $1.04 billion. Year-over-year, revenue decreased 1.4%, net income decreased 13.9%, operating cash flow increased 6.8%, and free cash flow increased 12.5%. The revenue decrease was driven by a 3% volume decline across the business, partially offset by 2% favorable price realization. The net income decrease was due to lower gross profit and higher business realignment costs, partially offset by lower SG&A expenses.
Hershey maintains a strong liquidity position with a debt-to-equity ratio of 1.26. The company has a $1.35 billion unsecured revolving credit facility with the option to increase borrowings by an additional $500 million. As of September 29, 2024, Hershey had $614.95 million in cash and cash equivalents, $1.20 billion in short-term debt, and $3.19 billion in long-term debt. The company's current ratio stands at 0.85, while its quick ratio is 0.54.
Innovation and History
Hershey's commitment to innovation has been a driving force behind its success. The company's journey began with the production and sale of caramel before transitioning to chocolate, which would become its signature product. In 1900, Hershey opened the world's largest chocolate manufacturing facility at the time in his hometown of Hershey, Pennsylvania, significantly increasing production and distribution capabilities. This early focus on innovation continued with the introduction of iconic products like Hershey's Kisses in 1907.
Resilience
Throughout its history, Hershey has demonstrated remarkable resilience. During the Great Depression, the company maintained operations and even expanded its product line. In World War II, Hershey contributed to the war effort by producing ration bars for the U.S. military, further solidifying its position as a major confectionery company. Following Milton Hershey's death in 1945, the company continued to grow under new leadership, expanding internationally with its first overseas manufacturing facility in Mexico in 1966.
Diversification Strategy
Hershey's diversification strategy has been crucial to its long-term success. The company has acquired numerous brands over the years, including Twizzlers, Reese's, and Jolly Rancher, broadening its product portfolio beyond chocolate. This diversification, coupled with continuous innovation, has helped Hershey navigate challenges such as fluctuating commodity prices and changing consumer preferences.
Recent Successes
One of the company's recent success stories is the introduction of Reese's Caramel, which has become the top innovation in the category this year. Additionally, the Reese's Lava brand has outperformed expectations, showcasing Hershey's ability to identify and capitalize on emerging trends. These innovative offerings have not only driven growth but have also strengthened the company's market share, solidifying its position as a dominant player in the industry.
Product Portfolio
Hershey's diversified portfolio extends beyond its iconic chocolate brands, with a strong presence in the salty snacks and sweets categories. The company's acquisition of Weaver Popcorn Manufacturing in 2023 has further bolstered its capabilities in the salty snacks segment, allowing it to leverage its supply chain and distribution network to drive growth in this complementary category.
Global Presence
Geographically, Hershey's operations span across North America and international markets, with a growing footprint in regions such as Latin America, Europe, and Asia. This global reach has enabled the company to capitalize on emerging opportunities and diversify its revenue streams, mitigating potential risks associated with reliance on a single market. Today, The Hershey Company operates in approximately 80 countries worldwide and markets its products under more than 90 brand names.
In the most recent quarter, 82.9% of net sales were from the North America Confectionery segment, 9.8% were from North America Salty Snacks, and 7.3% were from the International segment. The International segment saw a 3.9% decrease in net sales in Q3 2024 due to foreign exchange headwinds and volume declines, partially offset by favorable price realization.
Corporate Social Responsibility
The Hershey Company has also demonstrated a commitment to corporate social responsibility, with initiatives focused on sustainability, environmental stewardship, and community engagement. These efforts not only contribute to the company's positive impact on the world but also enhance its brand reputation and appeal among socially conscious consumers. The company remains headquartered in Hershey, Pennsylvania, continuing to be a major employer and contributor to the local community that bears its name.
Resilience in Challenging Times
Despite the challenges posed by the COVID-19 pandemic and ongoing macroeconomic uncertainties, Hershey has proven its resilience. The company has navigated these turbulent times with agility, adapting its operations and strategic priorities to ensure continued growth and profitability.
Segment Performance
The North America Confectionery segment reported net sales of $2.48 billion in Q3 2024, a 0.8% increase from the same period in 2023. This growth was driven by favorable price realization of approximately 2%, partially offset by volume declines of approximately 2%. The segment's income decreased by 14.5% to $724.8 million, primarily due to higher commodity and supply chain costs, partially offset by favorable price realization and lower advertising costs.
The North America Salty Snacks segment experienced a 15.5% decrease in net sales to $291.8 million in Q3 2024. This decline was primarily due to volume decreases of approximately 17%, partially offset by favorable price realization of about 2%. The segment's income decreased by 5.9% to $54.0 million, mainly due to volume declines and higher advertising costs, partially offset by lower supply chain costs and favorable commodity costs.
The International segment reported a 3.9% decrease in net sales to $218.4 million in Q3 2024. This decline was attributed to unfavorable foreign currency exchange rates and volume declines, partially offset by favorable price realization. The segment's income decreased by 55.2% to $14.2 million, primarily due to volume declines and higher commodity costs.
Future Outlook
Looking ahead, Hershey remains well-positioned for the future, with a strong pipeline of innovative products, a diversified business model, and a proven track record of delivering consistent financial performance. As the company continues to evolve and adapt to the changing consumer landscape, its legacy of innovation and resilience is poised to drive its sustained success in the years to come.
For 2025, Hershey expects high single-digit COGS inflation, primarily driven by a significant increase in cocoa prices compared to 2024 levels. The company's long-term algorithm targets 2-4% top-line growth, with pricing in 2025 expected to be similar to the low-to-mid single-digit increase seen in 2024. Hershey anticipates that productivity savings will help offset some of the inflation, but acknowledges the challenge in achieving the necessary level of savings.
The company expects a meaningful year-over-year impact from the normalization of incentive compensation, as 2024 performance was below target levels. Looking further ahead, Hershey believes 2026 could be an "above algorithm" year if cocoa costs stabilize or decline, potentially allowing for outsized growth.
The chocolate category that Hershey operates in has demonstrated resilience, with a 4% CAGR since 2009. This growth, combined with Hershey's diversified portfolio of brands in growing categories, provides a strong foundation for future success. The company continues to focus on innovation and is taking strategic actions to improve market share and drive growth, including new leadership in the North America Confectionery segment.