Hershey Combats Sluggish Sales With Cost-Saving Initiatives

The Hershey Company’s (NYSE:HSY) cost-cutting initiatives and productivity investments serve as effective hedges to a weak top-line performance. The company has been witnessing sluggish sales growth owing to changing consumer shopping habits, intense competition from the broader snacking environment in the United States and soft international sales. In 2016, sales increased a meager 0.7%, while the first nine months of 2017 saw a rise of only 1.9%.

Therefore the company resorts to various cost-saving initiatives to drive growth. Under its continuous improvement and productivity program, management has optimized its North American manufacturing footprint, added manufacturing capabilities in international markets, increased supply chain productivity and improved the sales mix significantly.

The company’s new cost-saving program, Margin for Growth, bodes well. As part of the multi-year program, Hershey plans to reduce its global workforce outside the United States by 15%. It will also improve the overall operating margin through supply chain optimization, a streamlined operating model and reduced administrative expenses, with savings likely to be registered in 2018 and 2019.

For 2017, Hershey’s expects $25 million in savings from the Margin for Growth program. Also, this program will likely generate cash savings at an annual run-rate of $150 million to $175 million and enable Hershey to achieve adjusted operating profit margin target of about 22-23% by the end of 2019.

Productivity improvement and cost-saving initiatives have helped the stock gain 11.2% so far this year compared with the industry’s decline of 20%.

Apart from cost-saving initiatives, Hershey is accelerating its business in key global markets to bolster its international presence. The company is making measured investments in core markets of Mexico, Brazil and India, where it is witnessing solid marketplace gains. Combined constant currency net sales growth in these markets was 8% in the last reported quarter.

Among the emerging countries, the company’s special focus is on China. It started implementing the Margin for Growth program in the second quarter of 2017 to optimize manufacturing operations in order to support the China business. Going forward, the company has devised a measured and disciplined strategy in China that is focused on the brand's messaging, continued e-commerce penetration and smaller store format expansion.

Moreover, Hershey regularly innovates its core brands to meet consumer demand and needs that are not addressed by its current portfolio. An important strategy of the company is to create a unique and holistic portfolio for every season, which can meet consumers’ seasonal shopping needs. Hershey’s core chocolate brands, Reese's, Hershey's, Kit Kat and Kisses, continue to drive growth. Also, Hershey's Cookie Layer Crunch’s have been performing well. The company expects innovative products to help it achieve its long-term net sales growth target of 2% to 4%.

Zacks Rank & Stocks to Consider

Hershey carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Zacks Consumer Staples sector are Flowers Foods, Inc. (NYSE:FLO) , Nomad Foods Limited (NYSE:NOMD) and Lamb Weston Holdings Inc. (NYSE:LW) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Flowers Foods’ expected earnings growth for 2018 is 7%.

Nomad Foods’ earnings are expected to grow 18.1% in 2018.

Lamb Weston Holdings surpassed earnings in all of the past four quarters, the average beat being 11%.

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