Although HSY's stock fell 6.4% yesterday in response to Chairman of the Hershey Trust Leroy Zimmerman's comments in the Patriot-News, which quieted rumors about HSY being up for sale, the Hershey Company's announcement today outlining its new long-term growth initiatives signals that the company is on the path to rightsizing its business model on its own.
- HSY has been milking its business for some time now by underinvesting in the business and lowering its advertising spend in an effort to keep margins stable and to meet Wall Street's earnings expectations. In doing so, the company has inevitably experienced an extended period of market share declines. In 2007, this lower level of advertising was proven not enough to protect margins from the slowing top-line growth, resulting in operating income margins that have fallen off of a cliff, down over 500 bps in each of the last 4 quarters.
- Today, the company announced that it will increase its total advertising spending by at least 20% in both 2008 and 2009 with a focus on its core brands, which make up 60% of total U.S. sales. This increased spending will further pressure margins so they could get worse before they get better, but it should help drive sales momentum and is necessary to the long-term sustainability of the business model and more importantly, the Hershey brand.
- The Hershey brand is by no means broken. Even in light of recent share declines, Hershey is the market leader of confections, which is the largest segment of the U.S. snack market and holds the number one position in chocolate as well with a 43% share of the market. That being said, in the past, the company failed to maintain its focus on its core brands. During its investor presentation today, CEO David West acknowledged that the company overestimated [its] ability to leverage [its] confectionery scale into adjacent categories and as such, the initial success of snacks was not sustainable. This diverted key resources both financial and human, away from [its] core at a time when others were ramping up.
Going forward, the company plans to focus on its core brands by not only increasing its advertising spending, but by also taking a more targeted approach. Management said it will no longer push variety into the market. We'll optimize our portfolio brands against the biggest opportunities that maximize incrementally. The company also stated its continued focus on improving its cost structure by executing on its previously announced global supply chain transformation program. Despite these cost savings, management is expecting 2009 to be another tough year from a commodity cost standpoint but still reaffirmed its commitment to investing in the brand, saying We'll do this in spite of increasing commodity costs as it is the right thing to do for the long-term health of our business. The company is now managing for the long term, rather than managing expectations...a definite step in the right direction!