Why did Hershey's second-quarter 2024 sales decline so sharply?

The filing attributes about 9 points of the decline in both consolidated and organic, constant currency net sales to planned inventory reductions in North America Confectionery and International tied to the second-quarter ERP system implementation. An additional approximately 7 points reflected lower retailer inventory and seasonal shipment timing within North America Confectionery, which is expected to shift to the second half of 2024.

How did Hershey change its 2024 outlook?

Net sales growth is now expected to be about 2%, compared with the prior 2% to 3% range. Reported EPS growth is now expected to be down 3% to down 1%, versus prior guidance of about 0%, and adjusted EPS growth is now expected to be down slightly, versus prior guidance of about 0%.

What drove the drop in profitability in the quarter?

The filing cites derivative mark-to-market losses, higher commodity costs, and fixed cost deleverage as reasons reported gross margin fell to 40.2% from 45.5%. Reported operating profit decreased 48.7% to $287.8 million, driven by volume declines, derivative losses, and higher commodity costs, which more than offset price realization and productivity gains.

How did the business segments perform?

North America Confectionery net sales decreased 20.7% to $1,579.8 million, with segment income down 29.3%. North America Salty Snacks net sales rose 6.4% to $289.9 million, with segment income up 19.2%. International net sales fell 8.9% to $204.8 million, and segment income decreased 39.2% to $25.0 million.

What are the company's key capital and cost plans for 2024?

The company expects capital expenditures of approximately $600 million to $625 million, driven by core confection capacity expansion and digital infrastructure including a new ERP system. It also expects interest expense of about $165 million to $175 million, a reported and adjusted effective tax rate of about 13%, and $100 million of savings from its Advancing Agility & Automation Initiative.

HSY 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed August 1, 2024. Cited figures are marked; the original filing is the authoritative source.

The Hershey Company reported second-quarter 2024 net sales of $2,074.5 million^a, a decrease of 16.7% from the prior year, with organic, constant currency net sales down 16.8%.

The filing attributes the decline mainly to planned retailer inventory reductions tied to the second-quarter enterprise resource planning (ERP) system implementation, roughly 9 points in North America Confectionery and International, plus an approximately 7 point decline from lower retailer inventory and seasonal shipment timing expected to shift to the second half of 2024. Reported net income was $180.9 million^b, or $0.89 per diluted share, down 55.1%, while adjusted diluted EPS was $1.27, down 36.8%. Reported gross margin fell to 40.2% from 45.5%, and reported operating profit declined 48.7% to $287.8 million.

CEO Michele Buck said the operating environment remains dynamic with consumers pulling back on discretionary spending. The company updated its 2024 outlook: net sales growth is now expected to be about 2%, down from the prior 2% to 3% range; reported EPS is now expected to decline 3% to 1%, versus prior guidance of about flat; and adjusted EPS is expected to be down slightly. Projected 2024 reported diluted EPS is $8.83 to $9.00^c and adjusted diluted EPS is $9.49 to $9.59.

The company also projects capital expenditures of $600 million to $625 million^d, interest expense of $165 million to $175 million, and $100 million of savings from its Agility & Automation Initiative. The filing is furnished under Item 2.02 and is not deemed filed for Section 18 purposes.

Segment results show North America Confectionery net sales down 20.7% to $1,579.8 million, North America Salty Snacks up 6.4% to $289.9 million, and International down 8.9% to $204.8 million. As of June 30, 2024, cash and cash equivalents were $467.1 million, short-term debt was $1.32 billion, and long-term debt was $3.49 billion.

02—Key points

Key Highlights

Second-quarter 2024 net sales of $2,074.5 million, down 16.7%; organic, constant currency net sales down 16.8%.
Reported diluted EPS of $0.89 (down 55.1%) and adjusted diluted EPS of $1.27 (down 36.8%).
Reported gross margin of 40.2% vs. 45.5% a year earlier; adjusted gross margin of 43.2%, down 200 basis points.
2024 net sales growth outlook lowered to about 2% from 2% to 3%; reported EPS growth now down 3% to down 1% versus prior guidance of about 0%.
Projected 2024 adjusted diluted EPS of $9.49 to $9.59, versus $9.59 in 2023.
North America Confectionery net sales fell 20.7% to $1,579.8 million, while North America Salty Snacks rose 6.4% to $289.9 million.
Sales declines were attributed mainly to planned retailer inventory reductions linked to the second-quarter ERP system implementation, with some timing shifting to the second half of 2024.

03—Questions

Frequently Asked Questions

Why did Hershey's second-quarter 2024 sales decline so sharply?
The filing attributes about 9 points of the decline in both consolidated and organic, constant currency net sales to planned inventory reductions in North America Confectionery and International tied to the second-quarter ERP system implementation. An additional approximately 7 points reflected lower retailer inventory and seasonal shipment timing within North America Confectionery, which is expected to shift to the second half of 2024.
How did Hershey change its 2024 outlook?
Net sales growth is now expected to be about 2%, compared with the prior 2% to 3% range. Reported EPS growth is now expected to be down 3% to down 1%, versus prior guidance of about 0%, and adjusted EPS growth is now expected to be down slightly, versus prior guidance of about 0%.
What drove the drop in profitability in the quarter?
The filing cites derivative mark-to-market losses, higher commodity costs, and fixed cost deleverage as reasons reported gross margin fell to 40.2% from 45.5%. Reported operating profit decreased 48.7% to $287.8 million, driven by volume declines, derivative losses, and higher commodity costs, which more than offset price realization and productivity gains.
How did the business segments perform?
North America Confectionery net sales decreased 20.7% to $1,579.8 million, with segment income down 29.3%. North America Salty Snacks net sales rose 6.4% to $289.9 million, with segment income up 19.2%. International net sales fell 8.9% to $204.8 million, and segment income decreased 39.2% to $25.0 million.
What are the company's key capital and cost plans for 2024?
The company expects capital expenditures of approximately $600 million to $625 million, driven by core confection capacity expansion and digital infrastructure including a new ERP system. It also expects interest expense of about $165 million to $175 million, a reported and adjusted effective tax rate of about 13%, and $100 million of savings from its Advancing Agility & Automation Initiative.

04—Continue

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