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The Hershey Company (HSY): One Stable High Growth/High Margins Business

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The confectionery market is characterized by high-growth and high-margin prospects compared with other packaged food segments. Since private-label competition is minimal, only 5% of the overall industry, there is only room for big players with well-positioned brands. These characteristics make it very attractive for investors. However, raw materials fluctuation along with external headwinds put pressure on firms’ profitability.

Let’s analyze how three players in the confectionery market are performing.

A chocolate champion you should own

The Hershey Company (NYSE:HSY) is a North American producer of sugar confectionery products, pantry items, chocolate, toppings and beverages, gum and mint refreshment products.

The company’s earnings of $1.09 per share rose 13.5% from the prior-year quarter driven by top-line growth and solid margins. Revenues increased 5.5% carried by core brand volume trends improvements in the US.

Hershey Co. (HSY)The Hershey Company (NYSE:HSY)’s US CMG (Candy, Mint, Gum) retail grew 8.6% year over year excluding Easter sales. Being the largest producer of quality chocolate in the US, the company enjoys a 43% market share in the country. In addition, the launch of Brookside brand, an acquisition made in January last year, added two percentage points to the volume growth this quarter and is showing good potential.

The company is carrying a supply chain and cost savings program called Project Next Century which, along with other initiatives, allowed an adjusted growth margin expansion of 240 basis points reaching 46.6%. I strongly support these improved efficiency and productivity benefits.

The Hershey Company (NYSE:HSY)’s investments in core brand marketing and continuous launch of superior quality products has always resulted in volume trend and market share gains. The company’s brand investments support its competitive advantage and explain its better volume elasticity compared to its competitors. However, advertising costs are significant to the company and are expected to increase 20% this year to support new product launches and promotional efforts in the US and overseas.

With an annual growth rate of about 6% over the last five years, The Hershey Company (NYSE:HSY)’s products are resistant to recessions since they are affordable and easily available to a wide diversity of consumers. Hershey is putting special international focus on China, Brazil and Mexico. Management expects international net sales to increase between 15% and 20%

The global gum to snack leader

Mondelez International Inc (NASDAQ:MDLZ) is a snack manufacturing company that produces biscuits, chocolate, candy and powdered beverages as well as gum and coffee for over 165 countries.

The company, after six months of being independent, finally shows a sequential acceleration in its top-line. Underlying sales grew 3.8% explained by a 2.5% benefit from increased volumes and favorable mix and 1.3% higher prices.

Its acquisition (Kraft Foods Group Inc (NASDAQ:KRFT)‘s acquisition, actually) of Cadbury in Jan. 2010 has opened new sales channels thanks to the latter’s vast distribution networks in developing markets. The emerging markets are important to the company in terms of growth as they showed a 9.3% underlying sales increase versus a 0.4% in developed markets.

Mondelez International Inc (NASDAQ:MDLZ) has a global leadership position supported by heavy expenses. It possesses a 15% share in the chocolate market, 30% of the gum category, and 18% of the biscuit market. The company is spending in advertising, improving routes-to-market, and increased sales capabilities. Although these investments are necessary and wise, they will affect its near-term profitability. The operating margin is now 10.3% after a contraction of 160 basis points.

Chocolate stores and luxury candy

Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF) is an international franchiser of gourmet chocolate, confection and a manufacturer of an extensive line of premium chocolates and other confectionery products that operates 298 chocolates stores and 63 co-branded stores in the US, Canada, Japan, and the UAE.

The company’s reported sales of $7.3 million for a 3% sales increase year over year. Total revenues are up 4.3% to $8.6 million. Franchise and royalty fees, which account for a 12.5% of revenues, reached $1.3 million.

Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF)’s co-branding long-term strategy is helping the company offer its proprietary confections where competitors cannot arrive. Recently, the company co-branded its first site location with self-serve frozen yogurt company U-Swirl. More sites are currently under development and will be opened later this year.

The company recently launched a new store design concept that is specifically intended for high foot traffic regional shopping malls. The design makes strong emphasis on the Company’s unique upscale kitchen, which is its biggest distinctive factor. Based on encouraging initial results, management is requiring that all new company stores incorporate the new design.

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