No trick in Q3 (HSY)
Hershey reported Q3 EPS of $2.60 vs. the consensus estimate of $2.46. The upside was driven in part by more early shipments of Salty Snacks due to the ERP implementation and better gross margins. Organic growth of 10.7% exceeded consensus estimates of 8.8%.
Segments
Confectionery: Q3 Organic sales growth 10.1% with price +11.1%, volume/mix -1.0%.
Q2 Organic sales growth 4.8% with price +88.4%, volume/mix -3.6%.
Earlier seasonal shipments benefited Q3 volumes, and seasonal growth drove nearly half of the segment growth. The non-measured channels were also growth drivers. Management noted everyday chocolate sales slowing as elasticity increased as expected and a merchandising change at a key retailer. Growth in the non-chocolate portfolio was 9%, led by gum & mint growth of 12%. Candy, mint, and gum retail sales increased 2.5% in the 12-week period ending October 1, resulting in 120bps less market share. Pricing will moderate to +HSD% in Q4 as the company laps price increases last year. Segment margins expanded 290bps.
Salty Snacks: Q3 Organic sales growth 25.5% with price +3.3%, volume/mix +22.2%.
Q2 Organic sales growth 6.3% with price +6.6%, volume/mix -0.3%.
Growth was boosted by 16% due to earlier shipments to avoid disruption from the ERP implementation. Excluding the earlier shipments, sales were up MSD%. Retail sales were flat in the quarter. Dot’s retail sales grew 36%, in part driven by permanent distribution in a club retailer. SkinnyPop retail sales decreased 3.9%, resulting in 80bps share loss. Dot’s retail sales increased 17.6%, resulting in 160bps of share gain. Segment margins expanded by 40bps.
International: Q3 Organic sales growth -1.2% with price +4.1%, volume/mix -5.3%.
Q2 Organic sales growth 6.2% with price -3.4%, volume/mix +2.8%.
Heightened competitive activity and moderating category trends led to slower growth. Segment margins contracted 230bps.
Margins
Gross margins expanded 240bps YOY, improving from +130bps in Q2. Pricing and productivity gains more than offset inflation and higher manufacturing costs. Management now expects gross margins to be at the high end of the range for the year.
Looking forward
Management reaffirmed the components of guidance for 8% sales growth and 11-12% adj. EPS growth. Management cited changes with the consumer cutting back on discretionary purchases, shopping at discount channels, and buying smaller sizes – notable headwinds. Despite the recent pullback in the shares and the upside to Q3 results, the earlier shipments for N.A. confectionery and salty snacks weighed on sentiment. It is difficult to see how the current decline in volumes in the context of the increase in commodity costs and the company’s pricing measures to offset that, negatively impact the company’s future earnings potential. Hershey is also not secularly challenged to grow volumes. The company has several volume drivers looking forward to smaller price increases, innovation, additional capacity, and distribution opportunities. Hershey is a Best Idea long that is attractively priced for its future growth potential and visibility in earnings measured against near-term challenges presented by higher interest rates, GLP-1 drugs, and higher inflationary costs. For more details, please see our separate note.
Off to a slow start (KVUE)
Kenvue reported Q3 EPS of $.31, in line with expectations. Organic sales grew 3.6% with price/mix of +7.1% and volumes -3.5%, compared to growth of 7.7% with price/mix of 9.4% and volumes -1.7% in Q2. Two-thirds of the volume impact was due to portfolio rationalization and market softness in China.
- Self Care's organic growth was 6.7%, with a price/mix of +5.5% and a volume growth of 1.2%. A slow start to the cough/cold season was a headwind for the quarter, but it compares to a fast start last year.
- Skin Health & Beauty's organic growth was -0.4%, with a price/mix of +6.4% and a volume decline of 6.8%.
- Essential Health's organic growth was 3.8%, with a price/mix of 10% and a volume decline of 6.2%.
Gross margins expanded 80bps YOY, improving from -180bps YOY sequentially. The drivers included price increases, productivity initiatives in the supply chain, and non-recurring separation-related benefits, somewhat offset by a larger Fx headwind of 130bps, and input cost inflation. Operating margins contracted by 120bps YOY. Incremental standalone public company costs were $50-60M.
Management tightened the upper end of guidance due to Fx and a slower start to the cough/cold season. Fx is now expected to be a slightly greater headwind of -1 to -2% from -1% previously. Organic revenue growth is expected to be +5.5-6% from 5.5-6.5% previously. EPS is now expected to be between $1.26-1.28 from $1.26-1.31 previously. In its brief time being an independent public company Kenvue has done a better job demonstrating why the parent company wanted to spin it off rather than prove why it should be a consumer health pure play. At least the company has limited risk from GLP-1 drugs.
Tomato dumping (APPHQ)
Tomato farmers in the U.S. are supporting an initiative to terminate the Tomato Suspension Agreement with Mexico and impose antidumping duties. 100 Tomato growers from 13 states are asking the Commerce Department to terminate the Agreement. The Fresh Produce Association of the Americas, a group of distributors of Mexican fresh produce, is campaigning to keep the reference price in the agreement, which helps stabilize prices. 450 companies have sided with the distributors and signed a letter supporting the current Agreement. Everyone wants cheaper tomatoes. The indoor grow facilities were never going to be accused of dumping products – probably says something about the business plans of indoor grow facilities vs. tomatoes grown in Mexico.
