The Hershey Company (NYSE:HSY), a leading confectionery manufacturer in North America, faces significant headwinds as it navigates through a challenging market environment. Rising cocoa costs, shifting consumer preferences, and intensifying competition have put pressure on the company's growth prospects and profitability. This comprehensive analysis examines Hershey's current position, future outlook, and the factors influencing its stock performance.
Company Overview
Hershey, known for iconic brands such as Hershey's, Reese's, and Kit Kat, has long been a dominant player in the U.S. chocolate market. The company generates over 90% of its sales in North America, with a diverse portfolio that includes chocolate, sugar confectionery, and more recently, salty snacks. With annual revenues of $10.97 billion and EBITDA of $2.95 billion, Hershey has maintained a strong market position despite evolving industry dynamics. According to InvestingPro data, the company maintains a Good Financial Health Score, supported by its ability to cover interest payments with cash flows and moderate debt levels.
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Recent Performance and Challenges
Hershey's recent performance has been marked by several challenges that have raised concerns among investors and analysts. The stock has declined 13.53% over the past year and is currently trading near its 52-week low of $159.87. The most significant challenge is the sharp rise in cocoa costs, which is expected to have a substantial impact on the company's profitability in the coming years. InvestingPro's Fair Value analysis suggests the stock may be undervalued at current levels, despite these headwinds.
Cocoa Cost Pressures
Cocoa prices have reached multi-year highs, driven by supply constraints and increased demand. This surge in costs is particularly problematic for Hershey, as cocoa represents approximately 20% of its cost of goods sold. Analysts expect these elevated cocoa costs to persist due to factors such as disease affecting cocoa trees and competition from mining activities in cocoa-producing regions.
The impact of rising cocoa prices is expected to be most pronounced in 2025, with some analysts projecting a double-digit earnings per share (EPS) shock for Hershey. While the company has announced pricing actions to mitigate these cost pressures, there are concerns that these measures may not fully offset the impact, particularly in the first half of 2025.
Volume and Market Share Trends
Hershey has been experiencing volume weakness and market share losses in its core North American Confectionery segment. This trend is particularly concerning given the overall underperformance of the chocolate category compared to other snack segments. Year-over-year volumes for chocolate have been trailing other snacks by approximately 250 basis points on average from 2022 to 2024 year-to-date.
Analysts have noted distribution declines for Hershey products in measured retail channels, which could further exacerbate the company's volume challenges. Additionally, Hershey's channel mix, with significant exposure to underperforming drug retail and convenience stores, may be contributing to its market share erosion.
Pricing Strategy
In response to rising costs, Hershey has implemented and planned further pricing actions. However, this strategy carries risks in the current market environment. There are concerns that increased pricing could lead to greater than historical elasticity, especially as price points in adjacent snacking categories are trending lower.
The widening price gap between chocolate and other snacks may be redefining the value equation for U.S. chocolate consumers. This shift could potentially accelerate volume declines, particularly among price-sensitive consumers who may opt for alternative snack options.
Future Outlook
Despite the near-term challenges, Hershey's long-term prospects remain a subject of debate among analysts and investors. The company's outlook for the next few years is characterized by a mix of headwinds and potential opportunities.
2025 Projections
Analysts have revised their earnings estimates for Hershey downward, reflecting the anticipated impact of cocoa cost inflation and volume pressures. For 2025, EPS projections have been lowered, with some analysts expecting earnings to decline year-over-year from the current $8.70 per share. The company's P/E ratio stands at 18.59, while maintaining a dividend yield of 3.38% - notably, Hershey has maintained dividend payments for 54 consecutive years, demonstrating strong financial discipline despite market challenges.
Discover more valuable insights about HSY with InvestingPro's comprehensive research report, part of our coverage of over 1,400 top US stocks. The first half of 2025 is expected to be particularly challenging as the full impact of cocoa cost increases is felt.
However, there is potential for improvement in the latter part of 2025 and into 2026. If cocoa costs begin to normalize and Hershey's pricing actions take effect without significant volume erosion, the company could see a recovery in profitability.
Long-term Growth Potential
Looking beyond the immediate challenges, Hershey's long-term growth potential hinges on several factors:
1. Product Diversification: The company's expansion into salty snacks, particularly pretzels, has shown promise. Further diversification could help reduce Hershey's reliance on chocolate and mitigate the impact of cocoa cost volatility.
2. Innovation: Hershey's ability to innovate and adapt to changing consumer preferences will be crucial. This may include developing healthier snack options or reformulating existing products to appeal to health-conscious consumers.
3. International Expansion: While Hershey's business is predominantly U.S.-focused, there may be opportunities for growth in international markets, particularly through strategic partnerships or acquisitions.
4. Cost Management: Implementing effective cost-saving initiatives and improving operational efficiency could help offset some of the margin pressures from rising input costs.
5. M&A Potential: Rumors of a potential acquisition by Mondelez (NASDAQ:MDLZ) International have surfaced, highlighting the possibility of industry consolidation. While such a deal would face significant hurdles, it underscores the strategic value of Hershey's brands and market position.
Bear Case
How might persistent cocoa cost inflation impact Hershey's profitability?
Persistent cocoa cost inflation poses a significant threat to Hershey's profitability. As cocoa represents a substantial portion of the company's cost of goods sold, continued price increases could lead to margin compression and earnings declines. While Hershey has implemented pricing actions to offset these costs, there are limits to how much the company can raise prices without negatively impacting demand.
If cocoa prices remain elevated for an extended period, Hershey may face a challenging balancing act between maintaining market share and protecting profitability. The company's heavy reliance on chocolate products makes it particularly vulnerable to cocoa cost fluctuations compared to more diversified competitors. This could result in a prolonged period of earnings pressure and potentially impact Hershey's ability to invest in growth initiatives or return capital to shareholders.
What risks does Hershey face from changing consumer preferences towards healthier snacks?
The shift towards healthier snacking options presents a significant risk to Hershey's core business. As consumers become more health-conscious, traditional chocolate and sugar confectionery products may face declining demand. This trend is already evident in the underperformance of the chocolate category compared to other snack segments.
Hershey's product portfolio is heavily weighted towards indulgent treats, which may become less appealing to health-focused consumers. The company's limited diversification outside of chocolate and confectionery products leaves it exposed to these changing preferences. While Hershey has made some moves into healthier snack options, such as protein bars, it may need to accelerate its efforts to adapt its product mix to align with evolving consumer tastes.
Furthermore, the potential for increased regulatory scrutiny or taxes on high-sugar products could create additional headwinds for Hershey's traditional offerings. Failure to successfully pivot towards healthier options could result in continued market share losses and challenge the company's long-term growth prospects.
Bull Case
How could Hershey's pricing power and brand strength help it navigate current headwinds?
Hershey's strong brand portfolio and historical pricing power could prove to be valuable assets in navigating the current challenging environment. The company's iconic brands, such as Hershey's and Reese's, command significant consumer loyalty and brand recognition. This brand strength may allow Hershey to implement price increases with less elasticity than lesser-known competitors.
Moreover, Hershey's dominant market position in the U.S. chocolate market gives it significant leverage with retailers. This could help the company maintain shelf space and distribution even as it adjusts pricing to offset rising costs. The company's ability to innovate within its core brands, introducing new flavors or formats, could also help justify price increases and maintain consumer interest.
Hershey's pricing power, if effectively leveraged, could enable the company to protect margins in the face of rising input costs. By carefully balancing price increases with promotions and product mix optimization, Hershey may be able to mitigate some of the impact of cocoa cost inflation while maintaining its market position.
What opportunities exist for Hershey to expand beyond its core chocolate business?
Hershey has several opportunities to expand beyond its core chocolate business, which could help diversify its revenue streams and reduce its exposure to cocoa cost volatility. The company's recent success in the salty snacks category, particularly with pretzels, demonstrates its ability to enter and compete in adjacent markets.
Further expansion into the broader snacking category could open up new growth avenues for Hershey. This could include:
1. Healthier snack options: Developing or acquiring brands that cater to health-conscious consumers, such as protein bars, nuts, or fruit-based snacks.
2. Functional foods: Creating products that offer specific health benefits or cater to dietary trends, such as low-sugar or high-protein options.
3. International expansion: Leveraging its brand strength to grow in markets outside North America, potentially through partnerships or acquisitions.
4. Non-food products: Exploring licensing opportunities to extend its brands into adjacent categories, such as flavored beverages or confectionery-themed merchandise.
By successfully diversifying its portfolio, Hershey could reduce its reliance on chocolate and cocoa, potentially smoothing out earnings volatility and opening up new growth opportunities. This strategy could also help the company better position itself to adapt to changing consumer preferences and market dynamics.
SWOT Analysis
Strengths
- Strong brand portfolio with iconic names like Hershey's and Reese's
- Dominant market position in U.S. chocolate market
- Pricing power and brand loyalty
- Established distribution network and retail relationships
- Growing presence in salty snacks category
Weaknesses
- Heavy reliance on cocoa as a key input
- Limited product diversification outside of chocolate and confectionery
- Predominantly U.S.-focused business
- Exposure to underperforming retail channels (drug and convenience stores)
- Underinvestment in brands outside of core Hershey's and Reese's lines
Opportunities
- Expansion into healthier snack options
- International market growth potential
- Further development of salty snacks portfolio
- Innovation in core chocolate brands (new flavors, formats)
- Potential for strategic acquisitions or partnerships
Threats
- Persistent cocoa cost inflation
- Shifting consumer preferences towards healthier snacks
- Intensifying competition in snack category
- Potential regulatory challenges (sugar taxes, labeling requirements)
- Macroeconomic factors affecting consumer discretionary spending
Analysts Targets
- TD Securities - Hold, $172 (January 8th, 2025)
- Citi Research - Sell, $159 (January 8th, 2025)
- Evercore ISI - In Line, $195 (January 7th, 2025)
- BofA Global Research - Neutral, $180 (December 12th, 2024)
- Barclays (LON:BARC) - Equal Weight, $180 (December 11th, 2024)
- RBC Capital Markets - Sector Perform, $183 (December 10th, 2024)
- Citi Research - Sell, $165 (December 10th, 2024)
- Piper Sandler - Neutral, $168 (December 3rd, 2024)
- Barclays - Equal Weight, $180 (November 11th, 2024)
- Barclays - Equal Weight, $202 (November 7th, 2024)
- RBC Capital Markets - Sector Perform, $205 (November 5th, 2024)
- Piper Sandler - Neutral, $165 (October 23rd, 2024)
- Jefferies - Underperform, $163 (September 26th, 2024)
- Citi Research - Sell, $182 (August 27th, 2024)
- Barclays - Equal Weight, $204 (August 5th, 2024)
- RBC Capital Markets - Sector Perform, $209 (July 30th, 2024)
This analysis is based on information available up to January 9th, 2025.
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