The Hershey Company (NYSE:HSY), a cornerstone of the American confectionery market, faces a complex landscape of challenges and opportunities as it navigates through 2024 and beyond. Known for its iconic chocolate brands, Hershey is grappling with rising cocoa costs, shifting consumer preferences, and intense market competition. This comprehensive analysis delves into the company's current position, future prospects, and the factors shaping its stock performance.
Market Position and Recent Performance
Hershey maintains a dominant position in the U.S. confectionery market, leveraging its strong brand recognition and extensive product portfolio. However, recent data indicates a concerning trend of volume weakness and market share erosion in its core North American Confectionery segment. Analysts point to lagging consumption trends and distribution declines across several sub-categories as key factors contributing to this underperformance.
The chocolate category as a whole is underperforming compared to other snack segments, with year-over-year volumes trailing by approximately 250 basis points on average from 2022 to 2024 year-to-date. This broader trend is putting pressure on Hershey's core business, as the company faces the challenge of maintaining its market position in a shifting consumer landscape.
Financial Outlook and Challenges
Hershey's financial outlook for the near term appears challenging. Analysts have revised their earnings per share (EPS) estimates downward, reflecting concerns about volume growth and margin pressures. For the fiscal year 2024, EPS estimates have been adjusted to $9.29, down from previous projections. The outlook for 2025 is even more cautious, with EPS estimates lowered to $8.65.
The primary driver behind these downward revisions is the persistent pressure from cocoa costs. Cocoa, which accounts for approximately 20% of Hershey's cost of goods sold (COGS), has seen significant price increases due to supply constraints and other factors. The current 40-year low in stocks-to-grind ratios for cocoa indicates a bullish trend for cocoa costs, which is expected to continue impacting Hershey's profitability.
Pricing Strategy and Competitive Dynamics
In response to rising input costs, Hershey is considering incremental pricing actions. However, this strategy carries risks in a competitive market environment. Analysts express concern that Hershey's pricing plans for 2025 may not fully offset the impact of cocoa price increases, particularly in the first half of the year. There is also uncertainty about whether competitors will follow Hershey's lead on pricing, potentially putting the company at a disadvantage if it raises prices in isolation.
The widening price gaps between chocolate and other snack categories are redefining the value equation for U.S. chocolate consumers. This shift could accelerate volume declines for Hershey if consumers perceive chocolate as becoming relatively more expensive compared to alternative snack options.
Product Portfolio and Diversification
While Hershey faces challenges in its core chocolate business, the company's diversification into salty snacks presents a potential bright spot. Analysts note that the Salty Snacks segment, particularly pretzels, could outperform expectations. This diversification strategy may help offset some of the pressures in the chocolate category.
However, Hershey's Ready-To-Eat (RTE) Popcorn segment is showing signs of softness, indicating that not all areas of diversification are yielding positive results. The company's heavy reliance on its chocolate brands, particularly Reese's and Hershey's, coupled with limited diversification outside of chocolate, remains a point of concern for some analysts.
Supply Chain and Long-term Outlook
The challenges Hershey faces extend beyond short-term market dynamics. The loss of cocoa trees due to disease and mining activities suggests that elevated cocoa costs may persist over the long term. This structural change in the cocoa supply chain could have lasting implications for Hershey's cost structure and profitability.
Analysts project that these factors could lead to margin rebasing and potentially stagnant earnings from 2023 to 2026. The company's predominantly U.S.-focused business model may limit its ability to offset these pressures through international growth opportunities.
Bear Case
How might rising cocoa costs impact Hershey's profitability in the long term?
The persistent increase in cocoa prices poses a significant threat to Hershey's profitability. With cocoa accounting for about 20% of the company's COGS, the current 40-year low in stocks-to-grind ratios indicates a prolonged period of high input costs. The loss of cocoa trees due to disease and mining activities suggests that this is not a short-term issue but a structural change in the supply chain.
Hershey may face challenges in fully offsetting these costs through pricing actions without risking volume declines. The potential for margin compression over the next three years is high, as analysts project that earnings could remain stagnant from 2023 to 2026. This scenario could lead to a significant erosion of Hershey's historically strong margin profile, impacting investor confidence and stock valuation.
What are the risks of Hershey's pricing strategy in a competitive market?
Hershey's strategy of incremental pricing to combat rising costs carries substantial risks in the current competitive landscape. As price gaps between chocolate and other snack categories widen, consumers may increasingly perceive chocolate as a less attractive value proposition. This could accelerate the already concerning trend of volume declines, particularly among price-sensitive consumers.
There is also uncertainty about whether competitors will match Hershey's pricing actions. If Hershey raises prices while competitors hold steady, it could lead to further market share erosion. The company's channel mix, with significant exposure to underperforming drug retail and convenience stores, exacerbates this risk. The potential for greater than historical price elasticity in response to these pricing actions could result in a scenario where revenue gains from higher prices are offset by steeper volume declines, ultimately hurting overall profitability.
Bull Case
How could Hershey's diversification into salty snacks benefit the company?
Hershey's expansion into the salty snacks category, particularly with its pretzel offerings, presents a significant opportunity for growth and diversification. Analysts note that the Salty Snacks segment could outperform expectations, potentially offsetting some of the challenges faced in the core chocolate business.
This diversification strategy allows Hershey to tap into different consumer preferences and snacking occasions, reducing its reliance on chocolate products. As consumers increasingly seek variety in their snacking options, Hershey's presence in both sweet and salty categories positions it well to capture a larger share of the overall snack market. Success in this segment could provide a buffer against cocoa cost pressures and changing consumption patterns in the chocolate category, contributing to more stable overall revenue and potentially improving the company's risk profile.
What opportunities exist for Hershey in holiday-focused marketing?
Hershey has historically performed well during holiday seasons, and there is potential to further capitalize on this strength. By leaning into holidays where consumers increase purchase frequency, Hershey could drive higher volumes and potentially command premium pricing.
Holiday-focused marketing and product innovations could create excitement around the brand and encourage impulse purchases. This strategy aligns well with Hershey's strong brand recognition and could help maintain consumer loyalty even as everyday chocolate purchases face pressure. Additionally, holiday-themed products often carry higher margins, which could help offset some of the cost pressures the company is experiencing. By effectively leveraging seasonal opportunities, Hershey could create pockets of growth and profitability that stand out against the backdrop of broader market challenges.
SWOT Analysis
Strengths:
- Strong brand recognition and market leadership in confectionery
- Diversified product portfolio including chocolate and salty snacks
- Historically strong margin profile
- Effective seasonal and holiday-focused marketing
Weaknesses:
- Heavy dependence on cocoa prices, impacting cost structure
- Limited diversification outside of chocolate category
- Underinvestment in brands beyond Reese's and Hershey's
- Predominantly U.S.-focused business, limiting international growth opportunities
Opportunities:
- Expansion and growth in salty snacks segment
- Potential for innovative product development in response to changing consumer preferences
- Leveraging strong brand for premium pricing during holiday seasons
- Possible international expansion to diversify revenue streams
Threats:
- Persistent and rising cocoa costs due to supply chain issues
- Increasing competition from other snack categories
- Changing consumer preferences moving away from traditional chocolate products
- Potential for margin compression due to pricing pressures and input costs
Analysts Targets
- Piper Sandler: $165.00 (Neutral) - October 23rd, 2024
- Jefferies: $163.00 (Underperform) - September 26th, 2024
- Barclays: $202.00 (Equal Weight) - September 25th, 2024
- Citi Research: $182.00 (Sell) - August 27th, 2024
- RBC Capital Markets: $209.00 (Sector Perform) - July 30th, 2024
The Hershey Company faces a challenging period ahead as it navigates rising input costs, changing consumer preferences, and intense market competition. While its strong brand and market position provide a solid foundation, the company must address significant headwinds to maintain its financial performance and market share. Investors and industry observers will be closely watching Hershey's strategies for managing cocoa costs, pricing actions, and diversification efforts in the coming years. This analysis is based on information available up to October 24, 2024.
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