“As COVID-19 vaccines roll out across the globe, consumers are more optimistic about the future and looking forward to spending more time with their family, friends and community. As we have seen over our 127-year history, our brands play an important role in these special moments of connection, comfort and happiness” as illustrated by “better than expected” performance in away-from-home businesses the last three months, which grew high-single digits versus the prior year period, CEO Michele Buck told investment analysts April 29 during the company’s Q1 earnings call.
At the same time, she added, “families continue to embrace the at-home lifestyle and our brands were part of many game and movie nights, seasonal celebrations, and baking creations.”
For example, she said, 43% of parents told the company they are having more movie nights this year compared to last and 36% claim they will increase movie nights in the coming months. Likewise,14% of the households that did not make S’mores during last year’s record season for the treat plan to make them this year, while those that did make them last year are “excited to make more this year as they re-connect with close friends, families and neighbors.”
Consumers also continue to “create special moments for their families at home” around holidays, helping drive a strong sales increase of 9.9% in chocolate take-home and seasonal products – surpassing expectations around Valentine’s Day, Easter and other seasonal occasions in the first quarter, Buck said.
The result of these three trends converging was “a unique window of dual-strength as both our at-home and away-from-home businesses benefited in the quarter,” helping to drive up net sales 12.7% to $2.29bn and net income 47.3% to $3.95bn in the quarter, Steve Voskuil, senior vice president and CFO, told analysts.
“While we don’t expect trends to permanently stay this elevated in both at-home and away-from home channels, our teams are capitalizing on this unique window of dual strength as consumer behaviors change during the COVID recovery,” Buck added.
Indeed, as the year progresses, Voskuil said, Hershey expects its away-from-home business to continue to rebound and its at home business to “moderate” as the company starts to lap higher growth and share gains in the second half of the year compared to the same period in 2020 when many at-home orders were peaking.
Margins miss as inflation rises
Despite these trends fueling double-digit gross profit increases, The Hershey Co. did experience “a slight contraction in gross margin in the quarter” due to inflation related to raw material, packaging costs and higher supply chain expenses related to higher than anticipated demand that pushed the company to lean more heavily on co-manufacturers and co-packers, and incur higher warehousing and transportation costs, Voskuil said.
He assured analysts that Hershey expects these cost pressures to subside as volume begins to moderate throughout the year and new capacity comes on line early next year.
He also noted that previously announce price increases also will help offset some inflation-related expenses over the course of the year. During the company’s previous quarter’s earnings call it announced higher prices for seasonal items beginning towards the end of this year and in April it disclosed targeted price increases for its non-chocolate and grocery portfolio, which hadn’t seen price increases since 2014 and therefore was ready for a refresh.
Overall, he said, the company feels goo about how its inflation assumptions are playing out against is previously announced pricing plan, with the one exception being around packaging, which took a hit in part because of the snow storm in Texas earlier this year that impaired some manufacturing.
Ultimately, the “unique benefits” in the first quarter related to growth across channels paved the way for the company to increase its full-year expectations. It now expects net sales growth of 4-6% over the previously predicted 2-4% and earnings per share to be in the range of $6.64 to $6.86 – a 9-12% increase from $6.11 in fiscal 2020.