The 2H Setup (HSY)
Hershey reported Q4 EPS of $2.02 vs. consensus of $1.95. The upside was driven by better-than-expected margins. Organic revenue growth was -0.1%, but adjusted EPS grew 12.6% YOY.
Segment Performance
North American Confectionery organic growth increased by 2.1%. Volumes decelerated from -1 % in Q3 to -5.1% in Q4. Increased elasticity and weak volume trends have weighed on the shares. Chocolate retail sales grew 2.9%, outpacing the broader category. Gum gained 45bps of share, mints gained 215bps, but sweets lost share despite growing MSD%. The Halloween category grew 7.6%, and the Holiday category grew 3.3%.
North American Salty Snacks growth decreased by 24.6%. 16% points of the decline was due to shipment timing around the ERP transition. Salty Snacks were negatively impacted by the pull forward from the ERP implementation during the quarter. Skinny Pop trends were weak, with reductions in advertising and merchandising during the system implementation. Dots gained 50bps of share within the pretzel category.
International organic growth increased by 8.3% with sequentially improving volume growth.
Margin Trends
Gross margins expanded 50bps, compared to +240bps in Q3. The company will not be fully passing on higher input costs this year. Advertising and marketing increased by 5.8%, while other operating expenses increased by 3.7%. Hershey announced $300M of new cost savings initiatives, with $100M of savings expected to be realized in 2024. 70% of the savings will be reflected in SG&A.
Guidance & Outlook
Management guided 2024 EPS to flat vs. consensus expectations of 2.8% growth. Revenue guidance was for 2-3% growth compared to 3% consensus expectations with flattish volumes. The company has a third more innovation launches in 2024, like Caramel Reese’s. Management has approached initial guidance conservatively – having only missed one quarter since the initial pandemic outbreak. That being said, the initial guidance was above consensus expectations when initially issued for the past two years.
Despite continued input inflation, primarily in cocoa and sugar, the company’s plans do not incorporate new meaningful price increases; the price increases are primarily carryover from 2023. The inflationary +HSD% pressures are expected to pressure gross margins by 200bps in 2024.
Management foresees more levers and less difficult comparisons, savings initiatives, ERP impact, calendar impacts, and customer plans in the 2H than the 1H. That will result in 1H EPS growth to decline by double-digits in the 1H and increase similarly in the 2H. Guidance for the 1H is quite cautious, setting a lower base. If sell-through trends improve after the ERP with volumes benefiting from no new price increases, the shares could reflect that momentum in a quarter.
Q4 Not ready for the spotlight (KVUE)
Kenvue reported Q4 EPS of $.31, exceeding consensus expectations of $.28. The upside was driven by better-than-expected margins, while revenue was slightly below expectations. Total organic revenue decreased by 2.4%, with price/mix of +5.8% and volume of -8.2%. Sequentially, all segments saw organic growth decelerate. The main headwinds were softness in China, lapping a strong cold season last year, and missteps in U.S. skincare.
- Skin Health & Beauty organic growth was -8%. Management cited in-store execution missteps in the U.S. The North American management team has been revamped, and restoring Neutrogena is a priority.
- Self Care organic growth was -2%, driven by a 15% smaller cold season and difficult comparisons. Trade inventory reductions were a 1.3% headwind.
- Essential Health organic growth was +2.5%.
Gross margins expanded 220bps, driven by higher pricing, non-recurring separation benefits, and supply chain efficiencies partially offset by 70bps of Fx headwinds. Gross margin gains picked up from the 80bps of expansion in Q3. Operating margins expanded 190bps as the company absorbed ~$55M of public company costs.
Management guided 2024 EPS to $1.10-1.20 vs. consensus expectations of $1.26 and 2023 adjusted EPS of $1.29. Higher interest expense, tax rate, and share count are each a $.04 headwind compared to 2023. Revenue growth is expected to be 1-3%, bracketing consensus expectations of 2.3%. Organic revenue growth of 2-4% is expected to improve sequentially as the year progresses. The company expects gross margin gains in 2024 to fund increased investment in its brands. Public company costs and 50bps of Fx headwinds will more than offset continued gross margin gains. Elasticity will be a question mark in 2024 for Kenvue when most companies are pulling back on pricing. When J&J spun out Kenvue, the parent company made several decisions to ensure a favorable IPO. However, the timing was sub-optimal for Kenvue, which had more headwinds than tailwinds in the first year as a stand-alone company. Management is pointing towards the 2H when the timing improves.
Let’s start with gross margins (K)
Kellanova reported Q4 EPS of $.78, exceeding consensus expectations of $.74. Organic revenue grew 6.9%, and EPS grew 19%. Price/mix increased by 8.1% while volume declined by 1.2% compared to Q3’s 11.3% price/mix increase and 7.4% volume decrease. Fx was a 6% headwind to reported results in Q4.
- North America organic growth decreased by 0.8%. N.A. Snacks organic growth was flat. Frozen organic growth was -5%. Elasticities rose during the quarter. Innovation launches were reduced while capacity was constrained. More product launches in 2024 are expected to boost the top line.
- Europe organic growth was 10.3%, driven by a price/mix of 10%. Snacks grew 17%, while cereal grew 2%. Gross margin recovery drove a 24% increase in operating profit ex. Fx.
- Latin America organic growth was 5.3%, driven by price with a small decline in volumes. Operating profit decreased 19% ex. Fx.
- AMEA organic growth was 22%. Operating profit grew by 25% ex. Fx.
Gross margins expanded by 290bps, improving further from Q3’s 240bps expansion. Half the gross margin expansion was from productivity initiatives and improved supply and service levels, while the other half was from transition services reimbursement from WK Kellogg. SG&A as a percentage of sales was unchanged YOY, adjusting for Fx.
Management guided 2024 EPS to $3.55-3.65, bracketing consensus expectations. Organic revenue growth is expected to be 3%, with the U.S. trailing the international regions. Management continues to expect gross margins to expand in 2024. Operating margins are expected to reach 14% in 2024 and 15% in 2026. The expanding trends in gross margins provide visibility in management’s growth outlook in 2024. Kellanova’s faster growth rates, transition services reimbursement, and expanding gross margins make the case for the spin-off of the North American cereal business, but the costs were high. The company’s growth outlook, building off gross margin expansion and organic revenue growth internationally, put Kellanova’s visibility ahead of its peers. As investors become more comfortable with the company’s growth levers, we would expect the 15x P/E multiple to expand.
