Competitive Advantages Drive Sweet Growth Opportunities

As more investors fear a reversal of the huge market gains since mid-March, they should look to get defensive with their portfolio. This consumer goods firm holds an industry-leading market share and is seeing increased demand amid the COVID-19 pandemic. The firm is leveraging strong cash flows to invest in future growth opportunities. Best of all, the stock is currently priced as if profits will permanently decline by 20%.

Investors overlooking The Hershey Company (HSY: $142/share) are in the Danger Zone. Despite rebounding from its March lows, there’s still value in this Long Idea.

Snack Foods Get a Pandemic Boost

While the COVID-19 pandemic has caused some industries, such as airlines and cruise ships, to see demand evaporate in the short term, The Hershey Company is in a unique position to benefit as consumers eat more snacks, candies, and chocolates to find comfort and compensate for not going out as often.

In 2Q20, The Hershey Company’s retail takeaway (which measures how often consumers purchase the firm’s products relative to a specific market) rose 4% year-over-year (YoY) and rose almost 9% YoY in June alone. While overall volume was down in the quarter, due to international and world travel retail weakness, sales were only down 3.4% YoY in 2Q20. The firm’s ability to withstand the economic downturn provides a level of safety that is hard to find elsewhere.

Superior Distribution Platform Delivers Steady Cash Flows and Superior Market Share

Based on data from Information Resources Inc. (IRi), The Hershey Company owns six of the top 10 confectionary brands, as measured by retail sales in 2018, including Reese’s, Hershey’s, KitKat, Ice Breakers, Hershey Kisses, and Hershey Assortments. The Hershey Company leverages these brands, along with its distribution, product placement, and marketing to maintain a leading market share in each of its target markets, per Figure 1.

In 2019, The Hershey Company is the leading U.S. chocolate firm, with over 44% of the U.S. confection market. Privately owned Mars (M&M, Snickers, and more) is second, with ~30% of the market. Similarly, Hershey holds the number one position in the Mint category, with nearly 37% of the market and ranks number 3 in both gum and non-chocolate (which includes brands such as Twizzlers and Jolly Rancher) with 11% and 8% of those markets.

Figure 1: The Hershey Company’s Leading Market Share

Sources: New Constructs, LLC and IRi via HSY Presentation

The Hershey Company successfully innovates, through new variations of existing products or updated packaging to improve shelf appeal, to keep consumers buying its products. Per Figure 2, The Hershey Company has grown U.S. Retail takeaway (aka syndicated retail sales data) YoY in each of the last three years and the most recent quarter. Similarly, it has grown its U.S. Candy, Mint, Gum takeaway in two of the past three years and in the last quarter.

The Hershey Company defines takeaway as the rate at which its products are purchased compared to overall sales growth in the expanded multi-outlet plus convenience stores channels. When takeaway is greater than competitors’, the company gains market share. For instance, in 2Q20, the company noted its increased U.S. Candy, Mint, Gum takeaway drove a 227 basis point improvement in market share.

Figure 2: The Hershey Company’s Rising Takeaway

Sources: New Constructs, LLC and company filings.

*U.S. Retail takeaway is measured in the expanded multi-outlet combined plus convenience store channels, which includes candy, mint, gum, salty snacks, meat snacks, and grocery items.   

Transforming Into an “Innovative Snacking Powerhouse”

While The Hershey Company holds leading market positions in its core products, it is positioning to take advantage of snacking trends.

In an investor update in March 2017, The Hershey Company noted it wanted to be “an innovative snacking powerhouse.” The firm’s unique position, in that it generates significant cash flow from its existing brands, allows it to deploy capital into new business lines and products, through internal development or acquisition.

Then, the firm can integrate these products into its existing shelf space or negotiate for more shelf space with retailers with whom it already has existing relationships, to put new products on a fast track to success. As the firm’s chief growth officer, Mary Beth West puts it, “Our beloved confection brands will continue to be the engine that drives our business while we broaden our better-for-you portfolio, offering more snacking choices for more consumers.”

Superior Distribution Platform Delivers Future Growth from Better-for-You Snacks

To become a “snacking powerhouse”, The Hershey Company can utilize its existing geographical footprint, place products in desirable locations, and maximize success of new entrants. Since 2017, The Hershey Company has acquired multiple different brands to help grow its portfolio beyond sweets and candy. In early 2018, The Hershey Company acquired Amplify Snack Brands, the parent company of SkinnyPop popcorn, Tyrrells potato chips, Oatmega protein bars, and more. In late 2018, the firm acquired Pirate Brands, the market of Pirate’s Booty cheese puffs. Most recently, The Hershey Company purchased One Brands, the maker of One protein bars.

Expanding into these markets, commonly referred to as “better-for-you” snacks, positions The Hershey Company to appeal to younger consumers that increasingly want healthier options when choosing a snack. Multiple studies have shown that Millennials and Gen Z consumers want healthy and convenient options when snacking. In fact, The Hershey Company’s acquisition of protein bar brands appeals directly to younger consumers’ tastes. According to IRi’s State of the Snack Industry, Millennials are driving 41% of the growth in protein based snacks, such as protein chips, protein bars, and protein packs.

Furthermore, Grand View Research projects the healthy snacks market to grow by 5.2% compounded annually through 2025, which is above the expected growth rate of the candy and gum markets.

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Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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