Capital Spending

The years between 2001 and 2005 were the best of times for Hershey. Hershey’s sales grew at 5% per year, which is quite impressive for a domestically focused consumer staple company in a rather mature industry. Even more impressive, Hershey’s adjusted EPS grew at a 14% rate during this period as profit margins inflected higher. Not surprisingly, Hershey’s stock price rose by 75% on a total return basis (inclusive of dividends), easily outpacing the S&P 500’s and S&P Packaged Foods Index returns of 17% and 22%, respectively.

However, despite these strong results, the long-term health of the business was deteriorating beneath the surface. When Richard Lenny became CEO of Hershey in 2001, the company was spending $187 ...

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