Hershey (NYSE:HSY) Misses Q4 Revenue Estimates

Full Report / February 09, 2024

Chocolate company Hershey (NYSE:HSY) missed analysts' expectations in Q4 FY2023, with revenue flat year on year at $2.66 billion. Its non-GAAP profit of $2.02 per share was flat year on year.

Hershey (HSY) Q4 FY2023 Highlights:

  • Revenue: $2.66 billion vs analyst estimates of $2.72 billion (2.4% miss)
  • EPS (non-GAAP): $2.02 vs analyst estimates of $1.96 (3.2% beat)
  • Free Cash Flow of $467.4 million, up 57% from the previous quarter
  • Gross Margin (GAAP): 42.3%, down from 43.2% in the same quarter last year
  • Organic Revenue was down 0.1% year on year
  • Sales Volumes were down 6.6% year on year
  • Market Capitalization: $41.37 billion

Best known for its milk chocolate bar and Hershey's Kisses, Hershey (NYSE:HSY) is an iconic company known for its chocolate products.

The company was founded in 1894 by Milton S. Hershey, and it set itself apart from the crowd with its commitment to using high-quality ingredients and a special manufacturing process known as conching, which gives its chocolate a smooth and creamy texture.

In addition to its simple milk chocolate bar and signature Kiss wrapped in foil, Hershey is also known for Reese's Peanut Butter Cups, Kit Kat, Twizzlers, and Jolly Rancher hard candies. Hershey’s appeal is broad, but its core customer is someone with a sweet tooth. The company’s products are often associated with celebratory moments such as trick-or-treating on Halloween or roasting s’mores with your family. Despite trends in health and wellness, consumers still seek treats that provide moments of happiness.

Hershey's products can be found in a wide range of retail outlets such as grocery stores, convenience stores, drugstores, mass merchandisers, and even online retailers. In response to shifting consumer habits, Hershey also has an online store where customers can purchase Hershey products, merchandise, and gifts for others directly from the company.

Packaged Food

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences.The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors that offer chocolate products and treats include Crunch from Nestle (SWX:NESN), Cadbury and Toblerone from Mondelez (NASDAQ:MDLZ), and M&M's and Snickers from private company Mars.

Sales Growth

Hershey is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 11.1% over the last three years was decent despite selling a similar number of units each year. We'll explore what this means in the "Volume Growth" section.

Hershey Total Revenue

This quarter, Hershey's revenue grew 0.2% year on year to $2.66 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3.8% over the next 12 months, an acceleration from this quarter.

Volume Growth

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Hershey's quarterly sales volumes have, on average, stayed about the same over the last two years. This stability is normal because the quantity demanded for consumer staples products typically doesn't see much volatility. Hershey Year-On-Year Volume Growth

In Hershey's Q4 2023, sales volumes dropped 6.6% year on year. This result was a reversal from the 2.2% year-on-year increase it posted 12 months ago. A one quarter hiccup shouldn't deter you from investing in a business. We'll be monitoring the company to see how things progress.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.

Hershey's gross profit margin came in at 42.3% this quarter, in line with the same quarter last year. That means for every $1 in revenue, $0.58 went towards paying for raw materials, production of goods, and distribution expenses. Hershey Gross Margin (GAAP)

Hershey has good unit economics for a consumer staples company, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see above, it's averaged a healthy 43.9% gross margin over the last two years. Its margin has also been trending up over the last 12 months, averaging 3.8% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

In Q4, Hershey generated an operating profit margin of 17.5%, down 2.4 percentage points year on year. Because Hershey's operating margin decreased more than its gross margin, we can infer the company was less efficient and increased spending in discretionary areas like corporate overhead and advertising.

Hershey Operating Margin (GAAP)

Zooming out, Hershey has been a well-oiled machine over the last two years. It's demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 22.2%. On top of that, its margin has risen by 1.2 percentage points on average over the last year, showing the company is improving its fundamentals.


Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, Hershey reported EPS at $2.02, in line with the same quarter a year ago. This print beat Wall Street's estimates by 3.2%.

Hershey EPS (Adjusted)

Between FY2020 and FY2023, Hershey's EPS grew 52.5%, translating into a remarkable 15.1% compounded annual growth rate. If it can maintain this rate of growth, Hershey will more than double its EPS in the next five years.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 1.7% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Hershey's free cash flow came in at $467.4 million in Q4, down 23.1% year on year. This result represents a 17.6% margin.

Hershey Free Cash Flow Margin

Over the last eight quarters, Hershey has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a robust cash balance. The company's free cash flow margin has been among the best in the consumer staples sector, averaging 15.2%. However, its margin has averaged year-on-year declines of 4.1 percentage points over the last 12 months. If this trend continues, it could signal that the business is becoming slightly more capital-intensive.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Hershey's five-year average ROIC was 26.8%, placing it among the best consumer staples companies. Just as you’d like your investment dollars to generate returns, Hershey's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Uneventfully, Hershey's ROIC stayed the same over the last two years. A rising ROIC would be ideal, but this is still a noteworthy feat when considering its returns are already high.

Key Takeaways from Hershey's Q4 Results

We struggled to find many strong positives in these results. Its organic revenue unfortunately missed analysts' expectations and its operating margin missed Wall Street's estimates. Guidance for 2024 EPS also calls for no growth, implying $9.60 per share and below Wall Street analysts' estimates. Overall, this was a mediocre quarter for Hershey. The stock is flat after reporting and currently trades at $193.27 per share.

Is Now The Time?

Hershey may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Hershey is a good business. First off, its revenue growth has been solid over the last three years. And while its projected EPS for the next year is lacking, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, its impressive operating margins show it has a highly efficient business model.

Hershey's price-to-earnings ratio based on the next 12 months is 20.7x. There are definitely a lot of things to like about Hershey, and looking at the consumer staples landscape right now, it seems to be trading at a pretty interesting price.

Wall Street analysts covering the company had a one-year price target of $208.84 per share right before these results (compared to the current share price of $197.23), implying they saw upside in buying Hershey in the short term.

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