On Tuesday afternoon, we learned that the Hershey Company (NYSE:HSY) plans on raising prices for its products across the board an average of 8 percent. The irony is that this announcement was made just hours after Federal Reserve Chair Janet Yellen claimed that there is very little inflation in her testimony to Congress.
Hershey, however, is seeing the prices of raw materials from cocoa to packaging rise to the point where its margins are compressing. In order to compensate, the company plans on raising its prices. However, this is not going to be enough to meaningfully impact the company’s 2014 earnings figures, as the price increases will be introduced gradually. It will have its full impact in 2015.
Unfortunately, this means that the company’s earnings growth will be at the low end of its 9 percent – 11 percent guidance. Furthermore, the company’s sales growth is also going to be at the low end of its 5 percent – 7 percent guidance. It is likely for this reason that the stock has been underperforming the broader market this year, with shares down 2 percent versus the S&P 500, which is up 7 percent. But now that the company is raising prices, is it worth buying?
I still think that there is more downside in Hershey shares. Investors might like the fact that the company is raising prices. While Hershey has a very strong brand, consumers are always put off when they see the prices of things they buy rise. Now this effect is bigger for some companies than for others. Hershey should be relatively unscathed given that it is raising its prices from a relatively low point in the first place: a chocolate bar isn’t exactly a major purchase. But we should also note that Hershey products are often purchased by children who generally don’t have much money. With this in mind, I suspect that we could see a small decline in product sales.