The Hershey Company (NYSE:HSY), a leading confectionery manufacturer known for its chocolate, sweets, and snacks, faces a challenging landscape as it navigates rising cocoa costs and shifting consumer preferences. This comprehensive analysis examines Hershey's current position, future prospects, and the factors influencing its stock performance.
Introduction and Company Overview
The Hershey Company (NYSE:HSY) has long been a staple in the confectionery industry, with iconic brands such as Hershey's, Reese's, and Kit Kat. As of November 14, 2024, the company finds itself at a critical juncture, balancing its strong market presence against emerging challenges in the snacking sector.
Recent Performance and Market Trends
Hershey's recent performance has been marked by a series of headwinds. The company's third-quarter results for 2024 fell short of expectations, primarily due to weak Halloween sales and broader category challenges. This underperformance has led analysts to revise their projections downward for both the fourth quarter of 2024 and the first half of 2025.
The confectionery category as a whole has been underperforming compared to other snack segments. Year-over-year volumes for chocolate have trailed other snacks by approximately 250 basis points on average from 2022 to 2024 year-to-date. This trend has put pressure on Hershey's market share and overall growth prospects.
Cocoa Cost Pressures and Pricing Strategy
One of the most significant challenges facing Hershey is the persistent rise in cocoa prices. The company is grappling with a 40-year low in stocks-to-grind ratios for cocoa, indicating a bullish trend for cocoa costs that is expected to continue. Factors contributing to this trend include the loss of cocoa trees due to disease and competition from mining activities in cocoa-producing regions.
Cocoa costs, which account for approximately 20% of Hershey's cost of goods sold (COGS), are expected to remain elevated throughout 2025. This cost pressure puts Hershey in a difficult position regarding its pricing strategy. The company must decide whether to increase prices to cover rising costs or absorb these expenses to maintain long-term category stability and market share.
Analysts are closely watching Hershey's pricing decisions, as there are concerns that further price increases could lead to greater than historical elasticity in consumer demand. This is particularly worrisome given that price points in most adjacent snacking categories are trending lower, potentially redefining the value equation for U.S. chocolate consumers.
Volume Growth and Market Share
Hershey's volume growth expectations have been revised downward for the fourth quarter of 2024 and the first half of 2025. The company is facing distribution declines in measured retail channels, which has contributed to disappointing volume trends. Additionally, Hershey's channel mix is seen as unfavorable, with significant exposure to underperforming drug retail and convenience stores.
Market share trends have also been a concern, with Hershey experiencing ongoing losses in several sub-categories. Analysts note that there appears to be underinvestment in chocolate brands outside of Reese's and Hershey's, as well as low diversification beyond the chocolate category.
Future Outlook and Challenges
Looking ahead, Hershey faces a complex set of challenges and opportunities. The company's predominantly U.S.-based business could lead to margin rebasing and potentially stagnant earnings from 2023 to 2026. However, some analysts anticipate that 2026 could be a year of potential recovery and growth for Hershey if cocoa costs normalize and market share trends improve.
Hershey's ability to navigate the changing landscape of consumer preferences will be crucial. The company may benefit from leaning into holidays where consumers increase purchase frequency. However, it must also address the decline in everyday chocolate purchases, especially among low-income consumers.
Financial Projections
Earnings per share (EPS) estimates for Hershey have been adjusted downward by several analysts. For the fiscal year 2024, EPS estimates range from $9.29 to $9.42, down from previous projections. The outlook for 2025 is even more conservative, with EPS estimates between $8.65 and $9.08, reflecting the anticipated impact of higher cocoa costs and volume challenges.
Despite these near-term headwinds, some analysts maintain a cautiously optimistic view for 2026, with potential for improved earnings if the company can successfully navigate the current challenges and benefit from a normalization of cocoa costs.
Bear Case
How will rising cocoa costs impact Hershey's profitability in 2025?
The persistent increase in cocoa prices poses a significant threat to Hershey's profitability in 2025. With cocoa accounting for approximately 20% of the company's COGS, the 40-year low in stocks-to-grind ratios indicates that these cost pressures are unlikely to abate in the near term. Hershey faces a difficult decision: either pass these costs on to consumers through price increases, potentially risking volume declines due to elasticity, or absorb the costs and accept lower margins. The impact on profitability could be substantial, with analysts revising EPS estimates downward for 2025. If Hershey is unable to effectively manage these cost pressures, it could lead to margin compression and a significant hit to the bottom line.
Can Hershey maintain market share amid pricing pressures and competition?
Hershey's ability to maintain market share in the face of pricing pressures and increased competition from other snack categories is a critical concern. The company has already experienced share losses in several sub-categories, and the widening price gaps between chocolate and other snacks could accelerate this trend. As consumers become more price-sensitive, there is a risk that they may shift their preferences to lower-priced snack alternatives. Additionally, Hershey's underinvestment in brands outside of Reese's and Hershey's, coupled with its low diversification beyond chocolate, makes it vulnerable to changing consumer tastes. If the company fails to adapt its product mix and pricing strategy effectively, it could face continued erosion of its market position, particularly in the everyday chocolate segment where purchase frequency is declining.
Bull Case
How might Hershey's pricing strategy offset cocoa cost increases?
Hershey's pricing strategy could potentially offset the impact of rising cocoa costs if executed skillfully. The company has a history of successfully implementing price increases, leveraging its strong brand equity and consumer loyalty. By carefully timing and structuring price adjustments, Hershey may be able to pass on a portion of the cost increases to consumers without significantly impacting demand. The company could also explore tiered pricing strategies or package size adjustments to maintain attractive price points while protecting margins. Furthermore, Hershey's focus on premium products and seasonal offerings, where consumers are typically less price-sensitive, could provide additional pricing power. If Hershey can balance these pricing actions with targeted promotions and marketing efforts to maintain volume, it may successfully navigate the cocoa cost challenge while preserving profitability.
What potential does Hershey have for growth in 2026 and beyond?
Despite near-term challenges, Hershey has potential for growth in 2026 and beyond. Several factors could contribute to a positive outlook:
1. Cocoa cost normalization: If cocoa prices stabilize or decrease by 2026, Hershey could see significant margin improvement, allowing for reinvestment in growth initiatives.
2. Innovation and diversification: By expanding its product portfolio beyond traditional chocolate offerings and investing in adjacent snacking categories, Hershey could tap into new growth markets and reduce its reliance on cocoa-based products.
3. International expansion: While predominantly a U.S.-focused business, Hershey has opportunities to grow its presence in international markets, potentially offsetting domestic challenges.
4. E-commerce and direct-to-consumer channels: As consumer shopping habits evolve, Hershey could leverage its strong brand recognition to build a robust online presence and direct sales model.
5. Strategic acquisitions: The company could pursue acquisitions in complementary snacking categories to diversify its portfolio and access new growth avenues.
6. Sustainability initiatives: By investing in sustainable cocoa sourcing and production methods, Hershey could appeal to environmentally conscious consumers and potentially secure more stable cocoa supplies.
If Hershey successfully executes these strategies, it could position itself for renewed growth and improved financial performance in 2026 and beyond, capitalizing on its strong brand and market position while adapting to changing consumer preferences and market dynamics.
SWOT Analysis
Strengths:
- Strong brand recognition and consumer loyalty
- Leading market position in the confectionery industry
- Established distribution networks and retail relationships
Weaknesses:
- Heavy reliance on cocoa as a key input, exposing the company to commodity price volatility
- Underperformance in some retail channels, particularly drug and convenience stores
- Limited diversification beyond chocolate products
Opportunities:
- Potential for growth in 2026 as cocoa costs potentially normalize
- Expansion into adjacent snacking categories to diversify product portfolio
- Leveraging e-commerce and direct-to-consumer channels for growth
- International market expansion
Threats:
- Persistent rise in cocoa costs impacting profitability
- Increased competition from other snack categories with lower price points
- Changing consumer preferences towards healthier snack options
- Potential for further market share erosion in core product categories
Analysts Targets
- Barclays (LON:BARC): $180 (November 11th, 2024)
- Barclays: $202 (November 7th, 2024)
- RBC Capital Markets: $205 (November 5th, 2024)
- Piper Sandler: $165 (October 23rd, 2024)
- Jefferies: $163 (September 26th, 2024)
- Citi Research: $182 (August 27th, 2024)
This analysis is based on information available up to November 14, 2024, and reflects the current market conditions and analyst perspectives as of that date.
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