Executive Summary / Key Takeaways

• The Hershey Company is navigating a period of significant headwinds, primarily driven by stubbornly high cocoa prices and the emergence of new tariff risks, which are expected to pressure earnings significantly in 2025.
• Despite these challenges, Hershey's core business remains resilient, particularly its iconic North America Confectionery brands, growing Salty Snacks portfolio (Dot's, SkinnyPop), and expanding Sweets segment, supported by strategic investments in capacity and innovation.
• Management is activating a comprehensive suite of mitigation levers, including pricing adjustments, price pack architecture, productivity enhancements, sourcing diversification, and operational efficiencies from its transformation program, to offset cost pressures and tariffs.
• While 2025 adjusted EPS is guided to be down by a mid-30% range, the company maintains confidence in a path to EPS growth and balanced top and bottom-line growth in 2026, contingent on the effectiveness of mitigation actions and potential moderation in commodity costs.
• Investors should monitor the impact of tariffs and the success of mitigation efforts, the trajectory of cocoa prices, consumer response to pricing and value offerings, and the execution of innovation and channel strategies, particularly in the instant consumable and international segments.

A Legacy Forged in Chocolate, Expanding into Snacking Power

The Hershey Company, founded in 1894, has long been synonymous with American chocolate, building a legacy rooted in iconic brands like Hershey's, Reese's, and Kisses. This deep heritage, including the philanthropic foundation laid by Milton Hershey with the creation of the Milton Hershey School in 1909, provides a strong emotional connection with consumers. In recent years, Hershey has strategically evolved beyond its chocolate core, articulating a vision in 2017 to become a "snacking powerhouse." This strategy aims to leverage the company's robust manufacturing, distribution, and brand-building capabilities to capture incremental consumers and occasions by expanding into complementary "white spaces" such as sweets, better-for-you snacks, and salty snacks.

This expansion has been fueled by targeted acquisitions, notably SkinnyPop popcorn and Dot's Homestyle Pretzels, which have established a significant presence in the North America Salty Snacks segment. The company's operational foundation for this growth includes substantial investments in its supply chain. A billion-dollar capacity expansion plan for chocolate, now nearing completion, was initiated to address prior constraints that limited the ability to meet demand, especially during peak seasonal periods. This investment, including a new Reese's chocolate processing facility, enhances agility, flexibility, and vertical integration, strengthening control over the supply chain by producing chocolate paste internally. This technological advancement is crucial for ensuring product availability and quality, particularly for high-demand items like Reese's and seasonal offerings.

Beyond physical infrastructure, Hershey is also leveraging technology through a comprehensive transformation program. The completion of the S/4 ERP system serves as a foundational digital layer aimed at driving cost efficiencies and improving operational effectiveness across the business. While specific quantifiable benefits of the ERP system beyond enabling cost savings are not detailed, the strategic intent is to enhance overall productivity and decision-making. The company's R&D efforts extend to exploring formulation adjustments, cocoa alternatives, and even monitoring cellular agriculture as potential long-term solutions to commodity volatility, although specific target metrics or timelines for these initiatives are not publicly disclosed. The "so what" for investors is that these technological and operational investments, from physical capacity to digital systems and R&D exploration, are designed to build a more resilient, agile, and cost-efficient supply chain capable of supporting both core brand growth and expansion into new snacking territories, providing a competitive moat against rivals.

In the broader industry landscape, the confectionery category has demonstrated historical resilience, consistently growing around 2% annually and outpacing other snack categories. However, the market is dynamic, influenced by shifting consumer behaviors, particularly a heightened focus on value in the current pressured economic environment. This has led to channel migration, with consumers increasingly favoring club stores and dollar stores over traditional convenience stores, impacting sales mix and profitability for impulse-driven categories. Competition is robust, not only from global giants like Mondelez International (MDLZ), PepsiCo (PEP), and General Mills (GIS) but also from smaller players and private label brands gaining traction in certain segments.

Performance Under Pressure: Navigating Commodity Headwinds and Market Shifts

Hershey's recent financial performance reflects the complex interplay of strategic execution, market dynamics, and significant cost pressures. The first quarter of 2025 saw net sales come in ahead of expectations, beating profit estimates, primarily bolstered by steady demand in the North America Salty Snacks segment and the timing benefit of a later Easter. However, overall Q1 2025 performance was marked by a projected year-over-year decline in both EPS (estimated down 36.8% per Zacks) and revenue (estimated down 13.3% per Zacks), highlighting the impact of ongoing headwinds.

Gross margin in Q1 2025 was down significantly, approximately 700 basis points, partly due to a small component of new tariffs but primarily reflecting higher input costs. SG&A expenses also rose meaningfully, influenced by a larger lap compared to reduced marketing spend following the ERP implementation in the prior year.

Looking at the full year 2025, management guidance anticipates net sales growth of at least 2%, roughly aligning with the company's long-term algorithm. This top-line outlook is supported by expectations for continued category resilience, the benefit of lapping prior-year headwinds such as reduced retailer merchandising and the exit of the Mexico drink business, a favorable Easter timing, and planned innovation and commercial activations weighted towards the second half. However, the guidance also incorporates the reality of a pressured consumer environment driving value-seeking behaviors and channel shifts, as well as heightened competitive activity in international markets.

Despite the projected sales growth, 2025 adjusted EPS is expected to decline by a mid-30% range. This significant bottom-line pressure is primarily attributed to substantially higher commodity costs, particularly cocoa, which is anticipated to be a much larger headwind than in 2024. The normalization of incentive compensation from lower 2024 levels and a higher effective tax rate also contribute to the expected EPS decline. Management acknowledges that the price increases implemented, while necessary to offset inflation, will not fully cover the expected cost headwinds, necessitating the activation of a full suite of mitigation levers.

Operationally, the company is seeing mixed trends across segments. North America Confectionery, while facing challenges like weakness in the instant consumable channel due to broader C-store pressures, is expected to see improvement in the second half driven by innovation and better execution. The Sweets portfolio continues to outperform, benefiting from strong consumer interest and innovation. The Salty Snacks segment, anchored by the continued strength of Dot's and regaining momentum in SkinnyPop, remains a key growth driver, despite some volume headwinds in Q1 2025 from fewer shipping days and a strategic reduction in private label manufacturing to prioritize branded products. The International segment, while smaller, saw strong Q1 2025 performance ahead of expectations, particularly in Brazil and with the Reese's brand, although heightened competitive activity is expected to limit full-year growth to low single digits.

Strategic Responses and the Path Forward

In response to the challenging cost and market environment, Hershey is deploying a multi-faceted strategy. Pricing remains a critical lever, with actions already taken and more seasonal and price pack architecture adjustments expected to impact results in Q2 and Q3 2025. While management is planning based on historical elasticity assumptions (around minus one), they note that recent elasticities have been more favorable, offering potential upside. Price pack architecture is seen as a way to offer perceived value to consumers without direct price point increases, leveraging the company's supply chain agility.

Beyond pricing, productivity and continuous improvement initiatives are central to offsetting inflation. The transformation program, supported by the new ERP system, is expected to yield cost savings across the P&L. The company is also exploring sourcing alternatives for cocoa, looking at opportunities to potentially secure lower prices in origin markets compared to exchange prices, acknowledging the current low commercial participation on the exchange.

The emergence of tariffs, particularly on cocoa and from Canadian retaliatory measures, adds a new layer of complexity. Management estimates the unmitigated impact could be up to $100 million per quarter in the second half of 2025. The company is actively engaged in influencing government action to seek exemptions while simultaneously accelerating mitigation efforts across productivity, pricing, sourcing, and manufacturing adjustments.

Competitive dynamics are also shaping strategic priorities. In North America, increased competition from private label and smaller players, particularly in the take-home segment, necessitates a focus on robust innovation and ensuring optimal product assortment and velocity on shelves, especially in instant consumables. Hershey is implementing a "gold standard" planogram for instant consumables, which has shown promising results in tests. In international markets, where some competitors are engaging in aggressive pricing, Hershey is focusing on driving growth through key brands like Reese's and leveraging distribution wins.

Looking ahead to 2026, despite the significant headwinds in 2025, management expresses confidence in a path to EPS growth and a return to balanced top and bottom-line growth, aligning with their long-term algorithm of 2-4% top-line growth. This outlook is predicated on the successful execution of the mitigation actions currently underway and the potential for some moderation in commodity costs. The company sees potential for "outsized growth" in 2026 if cocoa prices decline significantly. Capital allocation in 2025 is focused on M&A opportunities, such as the recent LesserEvil acquisition which expands the better-for-you platform, with share buybacks paused, although they remain part of the long-term capital allocation philosophy. Leadership changes, including new Presidents for U.S. Confection and Salty Snacks, a new Chief Customer Officer, and a new Chief Growth Officer, are expected to bring fresh perspectives and drive the next phase of growth and execution.

Competitive Positioning: Leveraging Brand and Adapting to Market Realities

Hershey operates within a competitive landscape dominated by large, diversified food and beverage companies and increasingly challenged by agile smaller players and private labels. Compared to global giants like Mondelez International, Hershey holds a dominant position in the U.S. confectionery market, leveraging its iconic brand portfolio to command pricing power and maintain strong gross margins. While MDLZ boasts greater global scale and a more diversified snack portfolio, Hershey's focused U.S. distribution network provides efficiency advantages in its core market, particularly in channels like convenience stores. However, MDLZ's faster innovation cycle in some segments could pose a challenge.

Against PepsiCo, a powerhouse in salty snacks, Hershey competes directly with its growing Salty Snacks segment (SkinnyPop, Dot's). While PEP benefits from immense scale and highly efficient distribution across a broad snack portfolio, Hershey differentiates through premium branding and targeted innovation in niche areas like ingredient-focused and better-for-you snacks (reinforced by the LesserEvil acquisition). PEP's operational efficiency in manufacturing and distribution often translates to lower costs per unit, potentially pressuring Hershey's margins in the salty segment if not offset by premium pricing and brand strength.

Compared to General Mills, which has a broader focus on packaged foods and a smaller presence in confectionery-adjacent snacks, Hershey maintains superior gross and operating margins, reflecting its stronger pricing power in confectionery. While GIS may have manufacturing efficiency advantages in certain pantry items, Hershey's strategic focus on confectionery innovation and expansion into high-growth snacking categories positions it for potentially faster revenue growth than GIS's more stable, pantry-focused business.

Hershey's core competitive advantages lie in its unparalleled brand equity in U.S. confectionery and its established distribution channels. These assets enable premium pricing and strong consumer loyalty, providing a buffer against competitive pressures. The recent investments in capacity and the transformation program, including the new Reese's plant and ERP system, are intended to enhance operational efficiency and agility, helping to counter potential cost disadvantages and improve responsiveness to market shifts. However, vulnerabilities remain, particularly the significant exposure to volatile commodity costs like cocoa and the need to accelerate innovation and adapt channel strategies to counter gains by smaller players and private labels. The company's proactive approach to ingredient regulation and exploration of alternative sourcing and formulations also represent strategic efforts to mitigate long-term risks and maintain a competitive edge.

Conclusion

The Hershey Company is currently navigating a period of significant financial pressure, primarily stemming from elevated cocoa costs and the uncertainty introduced by new tariffs. The outlook for 2025 reflects these headwinds, with expected earnings declining despite modest top-line growth. However, beneath the surface of these challenges lies a fundamentally resilient business with a clear strategic direction. Hershey's core brands maintain strong consumer loyalty, and its expansion into salty snacks and sweets is yielding positive results, diversifying its revenue streams and capturing new growth opportunities.

Management is actively deploying a comprehensive set of levers, from pricing and productivity to sourcing and operational enhancements, to mitigate the impact of cost inflation and tariffs. While the path to recovery in 2026 is acknowledged as challenging, the company's confidence in returning to balanced growth underscores the potential effectiveness of these strategic actions and the inherent strength of its portfolio and capabilities. For investors, the current period represents a test of Hershey's ability to execute its transformation and mitigation strategies in a volatile environment. Success in managing commodity costs, effectively implementing pricing and PPA, driving innovation, and optimizing execution across evolving retail channels will be critical determinants of the company's ability to deliver on its long-term growth aspirations and emerge stronger from the current headwinds.