Hershey: Challenging Macroeconomic Environment, But We Don't Recommend Selling It

Core Viewpoint - The Hershey Company has been downgraded from a bullish to a neutral rating due to declining net sales and a muted outlook for 2024, raising concerns about potential overvaluation [1][2]. Financial Information - For Q2 2024, Hershey reported revenue of $2.07 billion, which was$246.38 million below analyst expectations and represented a 16.7% decline year-over-year [4][6]. - Earnings per share (EPS) were $1.27, missing forecasts by$0.18 [4]. - The North America Confectionery segment, the largest for Hershey, experienced a significant decline in sales, contributing to the overall revenue drop [7][8]. Profitability - The gross margin decreased by 530 basis points, attributed to derivative mark-to-market losses, higher commodity costs, and fixed cost deleverage [13]. - Operating profit fell nearly 49% compared to the previous year, with the operating margin shrinking by 860 basis points [13]. Macroeconomic Environment - Poor consumer confidence and reduced discretionary spending have been identified as primary factors affecting Hershey's performance [9][10]. - Consumer sentiment in the U.S. has stagnated and trended downward, suggesting that demand for Hershey's products may not improve significantly in the near future [10]. Balance Sheet Insights - Accounts receivable have increased year-over-year, while sales have declined, indicating potential issues with credit sales and demand forecasting [12]. - Inventory levels are rising despite falling sales, which may lead to increased discounting and negatively impact profitability [12]. Valuation - Hershey's stock is trading at a significant premium compared to the consumer staples sector median, with a P/E Non-GAAP (TTM) of 21.95 versus the sector median of 18.35 [17]. - Despite the premium valuation, Hershey's multiples indicate it is selling at a discount compared to its historical valuation [18]. Dividend and Shareholder Returns - Hershey has a strong history of dividend payments, having paid dividends for over 34 years and committed to growing them for more than a decade [22][23].