Correction: A previous version of this story misstated the timeline of worker cutbacks at Hershey.
- Product innovation and cost-cutting measures boosted Hershey’s earnings in the second quarter, with net sales up 1.5% over the same period last year to $1.663 billion, and net income up 39% to $203.5 million, according to a company release. Both results beat Wall Street estimates for the quarter.
- Hershey’s North America business drove growth for the company, with net sales up 2.2% over the same period last year to $1.477 billion. Its international division, however, saw net sales decline 3.6% to $186 million, with volume down 2.1 points.
- “Second-quarter results were solid and we’re making progress against our strategic initiatives in a rapidly changing marketplace,” Michele Buck, Hershey’s president and chief executive officer, said in the release.
This was the first full financial quarter for Hershey Company CEO Michele Buck, who assumed the top role on March 1. Overall, Hershey continued to deliver on the innovation and new product measures she has long advocated as key to the company’s future growth. The confectionery giant also saw returns on its cost-cutting measures aimed at minimizing poor performing segments, such as its international division.
New product launches through its Krave and barkTHINS lines have boosted Hershey’s footprint beyond candy — a shift that has surprised analysts but is seen as a crucial step by Buck, who has said she wants Hershey to be a “snacking powerhouse.” At the same time, the company has focused on innovation in many of its core brands with releases like Hershey’s Cookie Layer Crunch Bars and Reese’s Crunchy Cookie Cups.
Hershey has also rolled out significant innovations in its supply chain and packaging operations. The company’s stand-up bags, meant to increase shelf visibility, were implemented earlier than expected this year, and contributed to Hershey’s sales growth, according to the earnings release.
Hershey has also zeroed in on cost-cutting measures at a time when retailers are shrinking their center store sections and consumers are shifting to healthier products. The company’s “Margin for Growth” restructuring initiative plans to boost profit margins by trimming administrative expenses and streamlining the supply chain. Most notably, Hershey announced in March it would cut 15% of its global workforce over three years. Most of these would be part-time workers in the international division.
While the company’s North American operations remain dominant, its expansion into overseas markets has been slow and plagued by missteps. China, in particular, has been a flop for the company. In 2013, Hershey planned a major expansion in the country, announcing an agreement to purchase China's Shanghai Golden Monkey for $584 million. In 2015, Chinese sales made up 4.5% of Hershey's revenue, and the company projected that its business in China would grow to $4.3 billion by 2019. Instead, sales have fallen and were down 31%, according to this latest earnings report.
Industry observers note that Hershey entered China at a time when other confectionery companies were crowding the market, and that it expanded into the country without fully understanding its consumers. Wednesday's report said the drop in sales was expected, given the country's "continued softness in the chocolate category" and SKU reduction.
In addition to slow international growth, Hershey faces significant headwinds in its North American operations. The company’s shift into snacking has diversified the company’s offerings, but has also entered it into a highly competitive market. Healthier eating habits on the part of consumers will also continue to challenge the confectionery giant, as will declining center store investments by retailers. Hershey has been proactive in listing nutrition information, increasing its collaboration with retailers, and other measures. The company will have to continue to fight against macro trends in order to sustain growth.
In the short term, however, Hershey can look forward to the Halloween and winter holiday seasons, which should provide a nice sales bump. Already this year, Hershey capitalized on the Easter holiday, gaining 1.6 market share points, according to its earnings release.