Hershey (HSY) has cracked over 10% post earnings, a continuation of a theme where the firm has failed to sustain the $110 level since 2014. The company's fourth-quarter results did provide fodder for the sell-off. Margin improvement is one of the last bastions of cash flow growth in the CPG space. Hershey's operating margins, however, contracted 240 basis points in the quarter and underwhelmed company's earlier FY17 guidance by 25 basis points. The company added that FY18 gross margins will be flat as well and attributed the flat guidance to a similar set of factors - unfavorable sales mix and new packaging initiatives.
Among developing risk-factors, it is interesting that the launch of a checkout-less convenience store by Amazon (AMZN) is not impressed on the investment thesis of the stock. If scaled and it is likely that they will be, such stores could influence a cutback in impulse purchases of candy, gum, and mint. This should concern investors as the firm has done reasonably well in categories such as the gum market which otherwise, is in decline. Hershey’s Ice Breakers Ice Cubes are incredibly popular but is the purchasing behavior driven by a preference of Ice Cubes over other brands? If consumers skip gum buying altogether, the advantage from that preference gets nullified. It is hard to delve into individual categories but I do see these developments hitting the top line in the long-run.
