Not sweet enough (HSY)
Hershey reported Q2 EPS of $2.01 vs. consensus of $1.91 with the upside driven by better margins and a lower tax rate. Organic revenue growth was 5%, decelerating from 12.1% sequentially. In Q2, the organic price increase was 7.7% and volume/mix decreased 2.7%. That compares sequentially to price of +8.9% and volume/mix of +3.3%.
- N.A. Confectionery grew 4.8% organically. U.S. retail sales growth of 10% was offset by inventory headwinds from lapping inventory replenishment last year and pull-forward in Q1. Gum and mint sales are outperforming the broader confection category as workers are returning to the office and increasing mobility. Halloween sales are planned to grow double-digits with better supplies available.
- N.A. Salty Snacks grew 6.3% organically. Some execution challenges and promotional shifts in Q3 led to lower than expected growth.
- International grew 6.2% organically.
5% incremental capacity coming online in chocolate and sweets this year. Two new Reese’s lines have been implemented and another is expected in Q4. A robust media plan will support the sell-through.
Gross margins expanded 130bps, improving from +80bps sequentially. Cocoa prices are at 12-year highs necessitating further price increases into 2024. The 2H of the year has HSD% price increases and 2024 has LSD% price increases planned. EBIT margins expanded 70bps, narrowing from +120bps sequentially.
Management guided EPS growth to 11-12% ($9.46-9.54) from 11% previously and reaffirmed revenue growth guidance. Management expects slightly higher price realization and higher elasticity in the 2H due to recent price increases. Gross margins are expected to expand by 80-90bps for the year. The dividend was raised by 15% to a 2% effective yield. Hershey has more difficult sales comparisons this year, but lower margin base effects. Investors were disappointed by the volume decline. Hershey’s combination of pricing power, low private label category share, capacity additions, and margin expansion set-up provides for a best-in-class growth formula. Hershey is a Best Idea Long.
Lowered revenue outlook (OTLY, STKL)
Oatly reported an EBITDA loss of $52.5M, below consensus expectations of -$47.5M. Total revenue increased 11.1% in constant currencies with volume growth of 3.4% and price/mix of 7.7%.
- EMEA revenue grew 17.5% in constant currencies, with volume of +7.2% and price/mix of +10.3%. Trends were stable compared to Q1 volume growth of +6.4% and price/mix of +10.4%. New markets now represent 5.2% of segment volumes, up 50bps YOY.
- Americas revenue grew 19.4% in constant currencies, with volume of +1.7% and price/mix of +17.7%. Retail revenue grew 10.5% while foodservice/other grew 30.2%. The price/mix decelerated significantly from +29.7% in Q1, but volume growth weakened from 6.5%. Distribution growth continued to accelerate to 24% in Q2. Advertising increased from 4% of sales to 6%.
- Asia revenue decreased 10.7% in constant currencies, with volume of -5.1% and price/mix of -5.6%.
Gross margins expanded 340bps YOY and 180bps sequentially driven by improvements in the Americas supply chain, partially offset by inventory write-offs and co-manufacturer penalties in Asia. SG&A costs increased $9.6M YOY mostly due to employee expenses. The company announced a cost savings plan in its Asia segment and cost cuts in the Americas and corporate that combined are expected to total $85M in 2024.
Management lowered revenue growth to 7-12% from 23-28% previously. About one-third of the lowered revenue growth outlook is due to the Americas while the other two-thirds are due to the U.S. Gross margins are expected to improve sequentially throughout 2023. Oatly’s global growth prospects were one of the most appealing as it came public, but in hindsight, it has been too challenging to be opening both the Americas and Asia at the same time. Oatly’s lower rate of growth in the Americas was attributed to a slower ramp-up in distribution and a “more muted performance for plant-based in general.”
Margin inflection (SAM)
Boston Beer reported Q2 EPS of $4.72, above consensus expectations of $3.38. The upside was driven by better revenue growth and margins. Depletions decreased by 3% with Twisted Tea and Dogfish Head growth being offset by Truly, Angry Orchard, Hard MTN Dew, and Samuel Adams. Shipment volumes decreased by 4.5% with growth in Twisted Tea offset by the other brands. The timing of the 4th of July holiday was a benefit to volumes.
Gross margins expanded 230bps due to price increases and procurement savings offsetting inflationary costs. Advertising and selling expenses decreased by 3.6%. G&A expenses increased by 15.6%.
Management is guiding to an EPS of $6-$10 for the year compared to the consensus of $7.03. Management maintained their guidance for depletions and shipments to decrease by 2 to 8%. Price increases are expected to be between 1-3%. Gross margin guidance of 41-43% brackets 1H performance and 2022. Shares should see a positive reaction to the margin inflection. Boston Beer has several years of lower base effects for margins. The expectations in the 2H are for expansion and the valuation implies considerably more expansion than the consensus estimates, keeping us on the sidelines. Our lack of visibility is due to Twisted Tea approaching nearly half the company’s volumes, but it is the only brand growing.
Lower food inflation (KR)
The USDA now expects food price inflation for 2023 to be slightly lower at 5.8% compared to 5.9% previously. The grocery store price inflation forecast was reduced by 1% to 4.9%. Food price inflation for 2024 is expected to decelerate to 2.4%. The USDA expects categories including pork, eggs, and dairy products to see deflation in 2024. The USDA is often a lagging indicator of the direction of food inflation as we saw in upward monthly revisions during 2022. We expect further reductions for grocery inflation in 2023 led by the perimeter departments.
