Hershey (HSY) investors are hoping for a sweeter 2024.
The candy giant is ending the year on a sour note after shares hit a new two-year low this week, down 21% compared to a year ago.
The chocolate maker was singing a different tune earlier this year, as its shares hit an all-time high in May. Its stock is down 34% since then, as fears over commodity inflation, pricing power, volume decline, and fierce competition continue to grow.
Overall, the Consumer Staples Select Sector (XLP) index is down roughly 5% over the past year, compared to the S&P 500’s (^GSPC) 25% gain.
Following a meeting with Hershey executives, JP Morgan analyst Ken Goldman said the tone of the company was not confidence-inspiring.
“We emerged incrementally more cautious about Q4 2023 and next year … and we are starting to think that consensus’ estimate for a flattish gross margin next year is highly optimistic,” Goldman wrote in a note to clients.
Hershey reiterated its 2023 full-year outlook last quarter. It expects net sales growth of roughly 8%, earnings per share growth of 13%-15%, and adjusted earnings per share growth of 11%-12%.
Higher prices for two much-needed ingredients — sugar and cocoa — aren’t helping its outlook.
Sugar prices have been on a roller coaster, even though they’re coming down. Sugar futures (SB=F) are up nearly 4% compared to a year ago, after jumping 40% year over year in early November.
“There has been volatility, especially with the weather patterns,”Andraia Torsiello, Mintec US sugar analyst, told Yahoo Finance over the phone, adding that “supply availability has improved year over year.”
Supply outlook is looking brighter in Brazil. India, another major producer, is recovering as well after the government “instructed mills to focus on sugar production rather than ethanol,” as unfavorable weather conditions resulted in poor crops this year.
And in the US, sugar beet harvest hit a record high in 2023.
Cocoa prices could offset that savings as a warmer weather pattern, known as El Niño, drifts over Asia. Cocoa futures (CC=F) are up roughly 65% compared to last year.
Goldman wrote Hershey said in its meeting that “the amount of cocoa inflation has been extraordinary.”
Irregular weather patterns have limited cocoa exports from India, as it focuses on domestic consumption, and Thailand’s supply will be short as well, David Branch of Wells Fargo told Yahoo Finance over the phone.
Branch expects the El Niño pattern to last through Q1 of 2024 and maybe the second half of 2024.
While Hershey CEO Michele Buck said in a call with investors that the company has “pricing and productivity” that can help offset the rising costs, the company’s comments to Goldman gave the analyst pause.
Statements like “we’ve gone to the pricing lever quite a bit over the last few years,” and “pricing remains a key part (of our longer-term strategy) but we also are sensitive to the consumer” did not alleviate concerns Hershey doesn’t have the pricing power to make up for higher input costs.
Innovation can help boost traffic
Chocolates being a recession-proof category is “no longer the case,” Goldman wrote in his note to clients.
In October, Hershey posted a 1% decrease in volume, while prices jumped 11.1% in North America confectionary.
As consumers have been battling headwinds all year with high interest rates, the return of student loan payments, and sticky inflation, they’re starting to pull back on small delights.
“Confections has definitely seen a little bit of softness recently,” Dan Sadler, IRI principal of client insights, told Yahoo Finance. While consumers are not necessarily forgoing all sweets, they are opting for smaller sizes and more affordable brands.
Other consumer staple companies to keep an eye on: JM Smucker (SJM), General Mills (GIS), Kraft Heinz (KHC), Kellanova (K), and WK Kellogg (KLG), among others.
General Mills CEO Jeff Harmening said consumers are seeking value, bringing into question whether these companies can raise prices like they once did — especially as the popularity of private labels grows.
“While many factors have evolved in line with our expectations, we are seeing consumers continue to display stronger-than-anticipated value-seeking behaviors across our key markets,” Harmening said on a call with investors.
Innovation, though, will be a key differentiator in bringing in new customers. Sadler said companies are finally able to move past woes of the pandemic like supply chain issues and shortages and focus on creating new offerings.
Oreo maker Mondelez (MDLZ) has done innovation right, per Morningstar director Erin Lash. The company opened a $50 million R&D center this year to help further develop its lines of Oreo cookies, Ritz crackers, and Sour Patch Kids candies. It’s also offering more options in chocolates, such as Toblerone Truffles and Tiny Toblerone.
“I would attribute the ability or the track record (of the stock performance) to consumer-valued innovation,” said Lash.
Having geographical diversification is a plus as well, Consumer Edge research analyst Connor Rattigan told Yahoo Finance over the phone.
“(Mondelez is) exposed to all sorts of emerging markets, Asia, Latin America … that can drive volume growth,” Rattigan said.
Rattigan also likes JM Smucker’s $5.6 billion acquisition of Hostess, as it can drive product creation and new sales. The iconic cake snacks’ dominance in convenience stores could help get Smucker’s Uncrustables in more locations, and cross-collaboration could result in new offerings — say, jelly-filled Twinkies.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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