The Hershey Company (NYSE:HSY), a confectionery giant known for its iconic chocolate brands, is navigating a challenging landscape marked by rising cocoa prices, shifting consumer preferences, and intense competition in the snack industry. As the company approaches the end of 2024, investors and analysts are closely scrutinizing its performance and future prospects.
Market Performance and Challenges
Hershey has been grappling with underperformance in the chocolate category compared to other snacks. Analysts note that year-over-year volumes in chocolate have been trailing by approximately 250 basis points on average from 2022 to 2024 year-to-date. This trend has raised concerns about the structural risks facing the company, particularly as price gaps between chocolate and other snacks continue to widen.
The company's channel mix has also come under scrutiny, with significant exposure to underperforming drug retail and convenience stores. This unfavorable distribution strategy has contributed to volume weakness and ongoing share losses in key markets, especially in the North America Confectionery segment.
Product Segments and Strategy
While Hershey's core chocolate business faces headwinds, the company's diversification into salty snacks has shown promise. Analysts expect the Salty Snacks division, particularly pretzels, to outperform expectations. However, the Ready-to-Eat (RTE) Popcorn segment continues to show softness, indicating mixed results across the company's product portfolio.
Hershey's strategy of focusing heavily on its core Reese's and Hershey's brands has led to underinvestment in other chocolate brands. This approach, coupled with low diversification outside of chocolate, has left the company vulnerable to category-specific challenges.
Cocoa Inflation and Pricing Strategy
One of the most significant challenges facing Hershey is the dramatic increase in cocoa prices. Cocoa futures have risen approximately 85% for 2025 compared to 2024 levels. While the company has secured its cocoa supply contracts for 2024 through futures contracts, it still faces substantial exposure for 2025.
Hershey's pricing strategy has become a critical focus for analysts. The company is not planning any pricing actions until after mid-2024 due to an ongoing ERP transition. This cautious approach to pricing adjustments reflects concerns about consumer tolerance for further price increases, especially as price points in adjacent snacking categories are trending lower.
Financial Outlook and Analyst Projections
The financial outlook for Hershey has been impacted by these market challenges. Analysts have revised their earnings per share (EPS) estimates downward for both 2024 and 2025. Some projections suggest that Hershey's predominantly U.S. business could lead to margin rebasing and potentially stagnant earnings from 2023 to 2026.
Specific EPS estimates vary among analysts, but the consensus indicates a downward trend. For instance, one firm lowered its EPS estimates for Hershey for 2024 to $9.42 from $9.54, for 2025 to $9.08 from $9.16, and for 2026 to $10.08 from $10.47.
Competitive Landscape
Hershey's position in the competitive landscape is under pressure. The widening price gaps between Hershey's products and other snacks could lead to accelerating volume declines. Everyday chocolate purchases are declining, especially among low-income consumers, which could further erode Hershey's market share.
The company's pricing plans for 2025 are not expected to fully offset the impact of cocoa price increases, particularly in the first half of the year. This situation is compounded by the fact that competitors may not follow Hershey's lead on pricing, potentially putting the company at a competitive disadvantage.
Bear Case
How might rising cocoa prices impact Hershey's profitability?
The significant increase in cocoa futures prices poses a substantial threat to Hershey's profitability. With cocoa accounting for approximately 20% of the company's cost of goods sold (COGS), the 85% rise in futures prices for 2025 could severely compress margins. While Hershey has secured contracts for 2024, the exposure in 2025 could lead to a sharp increase in production costs.
The company's cautious approach to pricing, delaying any actions until after mid-2024, may exacerbate the impact on profitability. If Hershey is unable to pass on these increased costs to consumers due to price sensitivity or competitive pressures, it could result in a significant erosion of profit margins. This situation may force the company to either accept lower profits or risk losing market share by raising prices, creating a challenging dilemma for management.
Can Hershey maintain market share amid increasing price gaps with other snacks?
The widening price gap between Hershey's chocolate products and other snacking options presents a significant challenge to the company's market share. As consumers become more price-conscious, they may opt for cheaper alternatives, leading to a potential shift in snacking preferences away from premium chocolate products.
Hershey's predominantly U.S.-focused business model makes it particularly vulnerable to these market dynamics. With limited geographic diversification, the company has fewer levers to pull to offset potential losses in its core market. The ongoing volume weakness and distribution declines across several sub-categories suggest that Hershey is already struggling to maintain its market position.
Furthermore, the company's underinvestment in chocolate brands outside of Reese's and Hershey's may limit its ability to appeal to diverse consumer preferences. This narrow focus could make it difficult for Hershey to compete effectively across the entire snacking category, potentially leading to further market share erosion as consumers explore a wider range of snacking options.
Bull Case
How could Hershey's diversification into salty snacks offset challenges in chocolate?
Hershey's expansion into the salty snacks category, particularly with its pretzel offerings, presents a promising opportunity to counterbalance the challenges faced in its core chocolate business. The salty snacks segment has shown resilience and growth potential, with analysts expecting it to outperform expectations.
By leveraging its strong brand recognition and distribution network, Hershey could capitalize on the growing consumer demand for diverse snacking options. The company's experience in product innovation and marketing could be applied to develop and promote new salty snack products, potentially capturing market share in this expanding category.
Moreover, the salty snacks segment may offer better margin potential and less exposure to volatile commodity prices like cocoa. This diversification could provide a more stable revenue stream and help mitigate the risks associated with Hershey's heavy reliance on chocolate products.
What opportunities exist for Hershey to leverage its brand strength in a challenging market?
Despite the current challenges, Hershey's strong brand recognition and loyal customer base provide a solid foundation for future growth. The company has an opportunity to lean into holidays and special occasions where consumers tend to increase their purchase frequency of chocolate and confectionery products.
By focusing on seasonal offerings and limited-edition products, Hershey could create excitement and drive sales during peak consumption periods. This strategy could help offset the decline in everyday chocolate purchases and allow the company to command premium prices for unique, holiday-themed items.
Additionally, Hershey could explore innovative product formulations that address changing consumer preferences, such as healthier snacking options or portion-controlled packaging. By adapting its product lineup to meet evolving consumer demands while maintaining the quality and taste associated with its brands, Hershey could reinforce its market position and attract new customers.
SWOT Analysis
Strengths:
- Strong brand recognition and customer loyalty
- Industry-leading margin profile
- Well-established distribution network
- Expertise in product innovation and marketing
Weaknesses:
- High exposure to volatile cocoa prices
- Underinvestment in non-core chocolate brands
- Limited geographic diversification
- Unfavorable channel mix with exposure to underperforming retail segments
Opportunities:
- Expansion in the growing salty snacks market
- Potential for holiday-focused marketing and product strategies
- Development of healthier snacking options
- Leveraging brand strength for premium seasonal offerings
Threats:
- Rising cocoa input costs impacting profitability
- Changing consumer preferences away from traditional chocolate snacks
- Intense competition and pricing pressure in the snacking industry
- Potential for accelerated volume declines due to widening price gaps
Analysts Targets
- Jefferies LLC: $163.00 (Underperform) - September 26th, 2024
- Barclays (LON:BARC) Capital Inc.: $202.00 (Equal Weight) - September 25th, 2024
- Citi Research: $182.00 (Sell) - August 27th, 2024
- Barclays Capital Inc.: $204.00 (Equal Weight) - August 5th, 2024
- RBC Capital Markets: $209.00 (Sector Perform) - July 30th, 2024
- Piper Sandler: $179.00 (Neutral) - April 15th, 2024
The Hershey Company faces a complex set of challenges and opportunities as it navigates the evolving snack food landscape. While its strong brand and market position provide a solid foundation, the company must address rising input costs, changing consumer preferences, and intense competition to maintain its leadership in the confectionery industry. The analysis presented here is based on information available up to September 30, 2024.
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