Hershey Reports Third-Quarter 2023 Financial Results

The Hershey Company (NYSE: HSY) today announced net sales and earnings for the third quarter ended October 1, 2023, and reaffirmed its 2023 net sales and earnings outlook.

“We remain on track to deliver our full-year sales and earnings commitments after delivering strong third-quarter seasonal sell-in and successfully implementing our new Salty Snacks ERP system in October,” said Michele Buck, The Hershey Company President and Chief Executive Officer.  “As we exit the year, our retail teams are building impactful displays to engage consumers and drive demand while we increase brand investment and partner with retailers to launch exciting innovation to get 2024 off to a fast start.”

Third-Quarter 2023 Financial Results Summary¹

• Consolidated net sales of $3,030.0 million, an increase of 11.1%.
• Organic, constant currency net sales increased 10.7%.
• Reported net income of $518.6 million, or $2.52 per share-diluted, an increase of 29.9%.
• Adjusted earnings per share-diluted of $2.60, an increase of 19.8%.

2023 Full-Year Financial Outlook

The Company is reiterating its net sales growth, reported earnings per share, and adjusted earnings per share outlook for the year.

The Company also expects:

• An overall tax outlook that is relatively unchanged but reflects a higher investment in tax credits and a lower tax rate versus the previous outlook:
  • A reported and adjusted effective tax rate of approximately 15%;
  • Other expense, which primarily reflects the write-down of equity investments that qualify for a tax credit, of approximately $225 million to $230 million;
• Interest expense of approximately $155 million; and
• Capital expenditures of approximately $800 million to $850 million, driven by core confection capacity expansion and continued investments in digital infrastructure including the build and upgrade of a new ERP system across the enterprise.

Below is a reconciliation of projected 2023 and full-year 2022 earnings per share-diluted calculated in accordance with U.S. generally accepted accounting principles (GAAP) to non-GAAP adjusted earnings per share-diluted:

2023 projected earnings per share-diluted, as presented above, does not include the impact of mark-to-market gains and losses on our commodity derivative contracts that are reflected within corporate unallocated expense in segment results until the related inventory is sold since we are not able to forecast the impact of the market changes.

Third-Quarter 2023 Components of Net Sales Growth

A reconciliation between reported net sales growth rates and organic constant currency net sales growth rates, along with the contribution from net price realization and volume, is provided below:

The Company presents certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange.  To present this information for historical periods, current period net sales for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year.  As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

Third-Quarter 2023 Consolidated Results 

Consolidated net sales increased 11.1% to $3,030.0 million in the third quarter of 2023.  Organic, constant currency net sales increased 10.7%, driven primarily by price realization. Volumes increased slightly, driven by planned inventory increases within the North America Salty Snacks segment ahead of our early October ERP system implementation.

Reported gross margin was 44.9% in the third quarter of 2023, compared to 40.6% in the third quarter of 2022, an increase of 430 basis points driven by price realization.  Adjusted gross margin was 44.9% in the third quarter of 2023, an increase of 240 basis points compared to the third quarter of 2022.  Price realization and productivity more than offset higher manufacturing, commodity and overhead costs.

Selling, marketing and administrative expenses increased 13.1% in the third quarter of 2023 versus the third quarter of 2022, driven by media increases and capability investments.  Advertising and related consumer marketing expenses increased 20.0% in the third quarter of 2023 versus the same period last year, with higher investments across segments.  Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 9.9% versus the third quarter of 2022 driven by wage and benefits inflation, as well as capability and technology investments.

Third-quarter 2023 reported operating profit was $735.9 million, an increase of 32.2%, resulting in a reported operating profit margin of 24.3%, an increase of 390 basis points versus the prior year period.  This increase was driven by price realization and productivity, which more than offset higher brand investment, acquisition-related integration costs and inflation.  Adjusted operating profit of $753.4 million increased 22.4% versus the third quarter of 2022, resulting in an adjusted operating profit margin of 24.9%, an increase of 230 basis points.  This increase was driven by price realization and productivity, which more than offset increased brand and capability investment and supply chain inflation.

The reported effective tax rate in the third quarter of 2023 was 20.6%, an increase of 500 basis points versus the third quarter of 2022.  The adjusted effective tax rate was 20.4%, an increase of 450 basis points versus the third quarter of 2022.  Both the reported and adjusted effective tax rate increases were driven by a decrease in renewable energy tax credits versus the year-ago period.

The company’s third-quarter 2023 results, as prepared in accordance with GAAP, included items positively impacting comparability of $17.5 million, or $0.08 per share-diluted.  For the third quarter of 2022, items positively impacting comparability totaled $58.7 million, or $0.23 per share-diluted.

The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):

Segment performance for the third quarter of 2023 versus the prior year period is detailed below. See the table on components of net sales growth and the schedule of supplementary information within this press release for additional information on segment net sales and profit.

North America Confectionery

Hershey’s North America Confectionery segment net sales were $2,457.6 million in the third quarter of 2023, an increase of 9.9% versus the same period last year.  Organic, constant currency net sales increased 10.1% as double-digit price realization more than offset volume declines related to price elasticity.

Hershey’s U.S. candy, mint and gum (CMG) retail takeaway in the multi-outlet plus convenience store channels (MULO+C) increased 2.5% for the 12-week period ended October 1, 2023.  Hershey’s CMG share declined approximately 120 basis points due to unfavorable category mix and increased competitive innovation.  Organic net sales growth outpaced retail takeaway due to the timing of seasonal shipments versus sell-through and growth in non-measured channels.

The North America Confectionery segment reported segment income of $847.5 million in the third quarter of 2023, an increase of 19.9% versus the prior year period, resulting in a segment margin of 34.5% in the quarter, an increase of 290 basis points.  Gains were driven by sales growth and gross margin expansion, which more than offset higher brand and capability investments.

North America Salty Snacks

Hershey’s North America Salty Snacks segment net sales were $345.2 million in the third quarter of 2023, an increase of 25.5% versus the same period last year driven by volume and price realization. Volume increased 22.2%, reflecting an approximate 16-point benefit from planned inventory increases related to our ERP implementation in October.  Excluding this inventory impact, the base business grew approximately mid-single digits, with growth balanced across volume and price.

Hershey’s U.S. salty snack retail takeaway for the 12-week period ended October 1, 2023 in MULO+C was flat.  SkinnyPop ready-to-eat popcorn takeaway declined 3.9%, reflecting a slowdown in consumption trends in the popcorn category and increased competitive merchandising, resulting in a segment share decline of 80 basis points.  Dot’s Homestyle Pretzels retail sales increased 17.6%, resulting in a 160-basis point pretzel category share gain.

North America Salty Snacks segment income was $57.4 million in the third quarter of 2023, an increase of 29.0% versus the third quarter of 2022, resulting in a segment margin of 16.6%, an increase of 40 basis points versus the prior year period.  Volume leverage, price realization and productivity offset higher brand and capability investments and increased supply chain costs. Supply chain costs included approximately $10 million of expenses incurred related to the removal of certain Paqui branded items from retail shelves and warehouses in the quarter.

International

Third-quarter 2023 net sales for Hershey’s International segment increased 4.4% versus the same period last year to $227.2 million.  Organic, constant currency net sales decreased 1.2% as mid-single-digit pricing was more than offset by lower volume. This volume deceleration partly reflects planned items, such as the discontinuation of a dairy beverage product line in Mexico and a later holiday season in India, in addition to increased competitive activity and a moderation of growth rates in our categories globally.

The International segment reported a $31.7 million profit in the third quarter of 2023, reflecting a decrease of $3.7 million versus the prior year period as sales growth and margin expansion were more than offset by higher brand and capability investments.  This resulted in a segment margin of 13.9%, a decrease of 230 basis points versus the prior year period.

Unallocated Corporate Expense

Hershey’s unallocated corporate expense in the third quarter of 2023 was $183.1 million, an increase of $11.8 million, or 6.8%, versus the same period of 2022.  This increase was driven by higher compensation and benefit costs, as well as capability and technology investments, including the upgrade of the Company’s ERP system and related amortization.

In the assessment of our results, we review and discuss the following financial metrics that are derived from the reported and non-GAAP financial measures presented above:

Appendix I

Details of the charges included in GAAP results, as summarized in the press release (above), are as follows:

Derivative mark-to-market (gains) losses:  The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income.  Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period.

Business realignment activities:  We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability.  During the fourth quarter of 2020, we commenced the International Optimization Program to streamline resources and investments in select international markets, including the optimization of our China operating model to improve efficiencies and provide a more sustainable and simplified base going forward.  During the third quarter of 2023, we recognized a benefit in business realignment activities. During the third quarter of 2022, business realignment charges related primarily to other third-party costs related to this program, as well as severance and employee benefit costs. This program was completed in 2023.

Acquisition and integration-related activities:  During the third quarter of 2023, we incurred costs related to the acquisition of two manufacturing plants from Weaver Popcorn Manufacturing, Inc., the integration of the 2021 acquisitions of Dot’s Pretzels, LLC (“Dot’s”) and Pretzels Inc. (“Pretzels”) into our North America Salty Snacks segment and costs related to building and upgrading our new ERP system for implementation across our North America Salty Snacks segment in the fourth quarter of 2023.  During the third quarter of 2022, we incurred costs related to the integration of the 2021 acquisitions of Lily’s Sweets, LLC, Dot’s and Pretzels.

Tax effect of all adjustments:  This line item reflects the aggregate tax effect of all pre-tax adjustments reflected in the preceding line items of the applicable table.  The tax effect for each adjustment is determined by calculating the tax impact of the adjustment on the company’s quarterly effective tax rate, unless the nature of the item and/or the tax jurisdiction in which the item has been recorded requires application of a specific tax rate or tax treatment, in which case the tax effect of such item is estimated by applying such specific tax rate or tax treatment.