Hershey is the leader in the North American chocolate market, with a 43% share of sales. Its dominance with its core Hershey’s Kisses line often can overshadow a number of iconic brands that you don’t immediately associate with the company.
Successful brands such as Almond Joy, Milk Duds, Reese’s, York Peppermint Patty, Kit Kat and Twizzlers — not to mention cookies and chocolate sauce — help define one of the best product lineups in the business. Hershey isn’t just candy bars in your local supermarket or convenience store. Its retail distribution network encompasses theater concessions, vending machine services and a food service division where Hershey products are one of many ingredients in other end products.
An example of the company’s food service division products include co-branded products like Dairy Queen blizzard desserts, Rich’s cookie dough made with Reese’s peanut butter, and Betty Crocker Ultimate Fudge brownies made with Hershey’s fudge.
You see, the company dominates the dessert aisle at your local supermarket, whether you see the name Hershey or not.
The unique manufacturing network consists of seven plants located primarily in the Northeast, with one plant located in Guadalajara, Mexico. This is the integrated network that allows Hershey to sell its 80-plus product brands in more than 60 countries around the world.
Recent quarterly results point to a market leader with no intentions of easing off the pedal. The firm increased its advertising and marketing budget and continues to introduce new products to the roster. First-quarter earnings of 96 cents per share came in a full 18% above analyst expectations and 32% higher than last year’s figures.
Additionally, Hershey was able to successfully raise prices to help offset higher raw materials including sugar, fuel and packaging costs. Few companies have the market position and pricing power to increase prices in a still-uncertain market environment like Hershey does.
This helped lead to an 11% increase in revenue and an adjusted gross margin improvement of 180 basis points, or 1.8%. In case you’re wondering, yes, improving margins in a rising raw materials environment is an extreme rarity, but it speaks to the economies of scale of the $15 billion leader.
While the outlook from Chief Executive John Bilbrey for the remainder of the year was cautious, he did slightly increase the company’s earnings expectations moving forward. Bilbrey is dedicated to building out the international platform, recently announcing the acquisition of Brookside Foods, a private Canadian confectionery firm. The focus, however remains on increasing sales in emerging markets, so expect more deals in the near term.
The stellar results pushed Hershey to a new all-time high last month, and it barely slowed down even in the May-June swoon despite the weakness elsewhere in the equity markets. HSY now trades at 19 times next year’s earnings expectations, a premium to its peers, but warranted given recent results.
If you factor in more favorable input costs for cocoa and sugar like many analysts are predicting, you’ll find there is virtually no reason not to chip some chocolate and other food stocks into your portfolio here at the start of summer.
Jon Markman owns a long position in Hershey.