Hershey leans into Halloween, increased capacity to overcome challenges in second quarter

28-Jul-2023 - Last updated on 28-Jul-2023 at 11:12 GMT

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While recent price hikes may be reinforcing sales of Hershey’s confections and snacks, they are taking a toll on how much consumers buy – a dynamic compounded by inventory constraints and promotional shifts that executives optimistically project will ease in the back half of the year.

In the second quarter ending July 2, the company delivered double-digit earnings growth thanks in part to a 10% increase in everyday US confection retail sales and a 6.3% increase in net sales growth for salty snacks in North America – both of which were driven in part by higher prices.

In salty snacks, for example, inflation has driven price per transaction up double digits, while price realization of 7.7% across the board contributed to relatively flat volumes, which were also impacted by anticipated inventory headwinds, go-to-market challenges and some capacity constraints, CFO Steve Voskuil told investment analysts yesterday during the company’s quarterly earnings call.

He explained that net pricing realization in the second quarter was in line with expectations, and will continue to rise in the high single digits in second half of the year and low single-digits in 2024 as previously announced confection price increases begin to take effect and help offset anticipated cocoa and sugar inflation.

“Volume was a 2.7% headwind, driven by the lapping of inventory replenishment in North America Confectionary in Q2 of 2022, as well as the timing of promotional shipments into Q1 of 2023. Both were in line with expectations,” he said.

“Volume declines of 30 basis points in North American Salty Snacks were below expectations due to a shift in promotional activity into the third quarter, as well as go-to-market execution challenges. The shift in promotional timing was an approximate 30 basis point headwind to overall company results and is expected to be a comparable tailwind to the third quarter,” he added.

Voskuil and CEO Michele Buck stressed Hershey has action plans in place and implemented to improve its go-to-market performance in the second half of the year.

A salty snack snafu

The disappointing declines in the North American Salty Snacks segment comes as the company is dramatically transforming this part of the business to integrate, scale and better support current and future growth aspirations.

“In the first quarter, we began this journey by integrating our commercial teams and creating new roles to enhance our commercial planning, pricing, innovation and analytics capabilities. We also began work to integrate and optimize the supply chain to improve visibility, resiliency and efficiency. And as we exit this year, we will integrate the significantly enhance our technology platforms as we transition these businesses and plants onto one unified S/4 system,” Buck explained.

However, Buck acknowledged, the segment struggled with execution challenges and promotional shifts into the third quarter that caused net sales of 6.3% to come in below expectations.

“We had some promotions that we had planned to occur in Q2 that shifted to Q3 and then we have had some just basic issues as we have been bringing together all of those businesses that you would expect during a transition like that around sales and commercial and supply chain execution. So things just weren’t as connected as they needed to be,” said Buck.

She added: “We feel very good that the team is on it and focused on it and execution is something that we tend to do very well, so we have a lot of confidence in our ability to focus and get that back around. That said, of course, the back half of the year, as we have mentioned, is going to be -- have a lot of volatility that’s really tied to as we build inventory and then work through the implementation and anticipate that we will have lighter sales in the fourth quarter as a result of that, but we have confidence in our ability to fix the execution.”

Overcoming confection capacity constraints

Hershey also is actively managing capacity constraints that held back confectionary sales in the US in the second quarter and could continue to impact the back half of the year, but Buck said she is optimistic that new capacity and increased brand investment will enable Hershey to sustain momentum from Q2 through the rest of the year.

“With our increased chocolate capacity this year and additional co-manufacturing secured within sweets for next year, we can now ore aggressively pursue growth opportunities to improve our market share performance,” said Buck.

“This will include greater levels of innovation, distribution expansion and targeted increases in promotional activity in 2024 to return merchandising share to historic levels,” she added.

Confident in the benefit of additional capacity, innovation and distribution, Hershey raised its full year outlook and increased its anticipated earnings per share growth to positive 13-15% from a previous projection of negative 15%. Net sales growth projections remain the same for the full year at negative 8%.