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Vanina Egea
Vanina Egea
Articles (218)  | Author's Website |

A Combination of Brand Tradition and Innovation Is this Confectionery’s Recipe for Success

February 20, 2014 | About:

The Hershey Company (NYSE:HSY) was founded in 1893 and has become the largest chocolate manufacturer in the U.S. with 43% of the domestic market share. The company operates in more than 70 countries worldwide through a brand portfolio that comprises more than 80 brands including Hershey's, Reese's, Kit Kat, Twizzlers and Ice Breakers. It also manufactures sugar confectioneries, as well as pantry baking ingredients, toppings, beverages and gum and mint refreshment products. In addition, it produces and markets products through licensing agreements with Cadbury, which is operated by Mondelēz International Inc. (NASDAQ:MDLZand Nestlé SA (NSRGY).

A Wide Moat with Strong Brand Support

Hershey´s leading position in the confectionery market has allowed the company economies of scale and sturdy profit margins. These advantages are enhanced by the lack of private label penetration at a domestic level and the prime-shelf space granted to the industry in stores. Consequently, Hershey has developed a wide economic moat which adds to the global growth trend in the confectionery category at CAGR of nearly 5% in the last years.

To further empower its position, the company invests heavily in advertising and promotions to support its core brands as well as its new products, and it is also increasing its presence at retail outlets. These efforts are resulting in accelerated sales growth and margin expansion. In fact, almost half of U.S. CMG (chocolate, mint and gum) category growth was driven by Hershey over the last three years.

Product Innovation

Hershey´s robust brand support through advertising allies with its permanent innovation efforts. The firm regularly renews its core brands, creating a product portfolio for every season to meet customers’ shopping demands all year long. Its compelling merchandise offering reflects in sales growth, which beat management guidance of 7% in fiscal 2013. In the same period, earnings per share reached $3.72, resulting in an increase of 14.8% in relation to the prior year.

Improved Cost Structure

In order to expand its margins, Hershey carried out a supply-chain restructuring plan, which reduced production lines and outsourced the manufacturing of many low value- added products. Moreover, the company launched “Project Next Century” to create an advanced supply chain. Thus, production completely transitioned to a new facility in 2012, resulting in productivity gains of $70 million to $90 million.

International Expansion

Hershey is actively expanding its presence internationally in China, Indonesia, the Middle East and Brazil. These emerging markets pose a great opportunity for the firm’s growth, as middle-class consumers are significantly growing in number and migrating to urban areas. The company’s main target is China since management expects the country to become the fifth largest global confectionery market by 2016. Consequently, the firm recently acquired Shanghai Golden Monkey Food Joint Stock Co., a privately held Chinese confectionery firm and also started to sell a line of caramels under the Lancaster brand. It is worth noting this is the company´s first new brand in 30 years and it is the first time Hershey launches a product initially outside the U.S.

A Great Outlook

Moving on, Hershey recently raised its earnings guidance for fiscal 2014, expecting earnings per share in the range of $4.05 to 4.13.This represents an annual growth of 9% to 11%. Net sales are also expected to increase in the range of 5% to 7% in fiscal 2014, mainly due to volume growth. Hershey’s stocks trade at a premium multiple of 30.70 its trailing earnings compared to the industry average of 19.30. However, earnings growth shows a positive trend averaging 15.10 compared to its peers’ meager 3.20. Investment guru Joel Greenblatt (Trades, Portfolio) recently added Hershey’s holding to his portfolio supporting my bullish feeling about the company’s future growth.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website

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