Executive Summary / Key Takeaways

• Strategic Resilience Amidst Headwinds: The Hershey Company is executing a multi-pronged strategy to counter unprecedented cocoa inflation and tariff impacts, leveraging strategic pricing, operational efficiencies, and targeted innovation to protect profitability and drive future growth.
• Innovation and Portfolio Diversification: Significant investments in new product development across chocolate, sweets, and salty snacks, coupled with strategic acquisitions like Sour Strips and the pending LesserEvil deal, are expanding market reach and driving category share gains, particularly in non-chocolate segments.
• Operational Agility and Technological Edge: Recent completion of a new ERP system and ongoing Advancing Agility Automation (AAA) Initiative are enhancing supply chain control, manufacturing efficiency, and cost savings, providing a crucial competitive advantage in a volatile cost environment.
• Path to Balanced Growth: Despite a challenging 2025 outlook impacted by tariffs, management anticipates a return to "on-algorithm" balanced top and bottom-line growth in 2026, supported by pricing actions, productivity gains, and potential cocoa market normalization.
• Strong Brand Moat and Market Leadership: Hershey maintains a leading position in North America confectionery and is gaining traction in salty snacks, underpinned by iconic brands, strong consumer loyalty, and effective retail partnerships, which are critical for navigating competitive pressures.

A Legacy of Sweet Innovation and Strategic Evolution

The Hershey Company, founded in 1894 by Milton S. Hershey, has long been synonymous with chocolate and confectionery. Beyond its iconic treats, Milton Hershey's enduring commitment to education and community through the Milton Hershey School continues to shape the company's values. This deep-rooted heritage of quality and purpose has fostered strong consumer loyalty, a foundational strength in the competitive consumer staples sector. In 2017, Hershey embarked on a pivotal strategic shift, articulating a vision to become a "snacking powerhouse." This ambition has since guided significant investments and acquisitions aimed at diversifying its portfolio beyond traditional chocolate, particularly into the high-growth salty snacks and sweets categories.

The broader industry landscape is characterized by evolving consumer preferences, including a growing focus on value, health, and wellness. While consumer sentiment has softened, the confectionery, mint, and gum (CMG) category has demonstrated remarkable resilience, often serving an emotional role for consumers. Hershey's strategic response has been to innovate across its portfolio, offering products that cater to diverse needs, from indulgent treats to permissible snacks.

Competitive Landscape & Positioning

Hershey operates in a highly competitive global market, directly contending with multinational food and beverage giants such as Mondelez International (MDLZ), Nestle S.A. (NSRGY), and The Kraft Heinz Company (KHC). Hershey's market positioning is particularly dominant in North America, where its iconic brands like Hershey's and Reese's command strong brand loyalty and significant market share. This brand strength translates into pricing power and consistent demand, contributing to its robust gross profit margin of 40.12% and net profit margin of 13.54% on a TTM basis. In comparison, Mondelez reported a TTM gross profit margin of 39% and net profit margin of 13%, while Nestle showed a 47% gross profit margin and 12% net profit margin, and Kraft Heinz a 35% gross profit margin and 11% net profit margin. Hershey's operating profit margin of 18.72% (TTM) also stands competitively against MDLZ's 17%, NSRGY's 16%, and KHC's 7%, reflecting its operational efficiency in its core markets.

Hershey's strategy emphasizes brand loyalty and innovation in confectionery, giving it a competitive edge in customer retention. Its extensive distribution networks, a key competitive advantage, enable efficient market access and enhance capital efficiency through lower logistics costs. This contrasts with MDLZ's broader global snack portfolio and NSRGY's diversified health-focused offerings. While MDLZ and NSRGY boast larger global footprints and more diversified revenue streams, Hershey's focused execution in its core North American segments and targeted expansion into adjacent categories allow it to capture significant market share. For instance, in Q2 2025, Hershey's U.S. CMG consumer takeaway increased by 21.8%, leading to a 90 basis point market share increase. Its salty consumer takeaway also grew by 6.1%, with a 26 basis point market share increase.

However, Hershey faces vulnerabilities, particularly its dependence on commodity prices, notably cocoa, and a relatively less diversified international presence compared to its global peers. This commodity exposure can strain its cost structure, as evidenced by the significant gross margin declines in H1 2025. The company also faces increased competition from private label and insurgent brands, particularly in the "take-home" chocolate segment, necessitating continuous innovation and strategic pricing. In international markets, especially Brazil and Mexico, competitive activity has intensified, with some players engaging in aggressive pricing promotions.

Technological Differentiators & Operational Excellence

Hershey's strategic investments in technology and operational capabilities are central to its competitive moat and ability to manage cost pressures. The company completed a significant upgrade of its Enterprise Resource Planning (ERP) system across the entire enterprise in the second quarter of 2024. This technological overhaul provides tangible benefits, including enhanced efficiency, better cost allocation, and improved supply chain visibility. While it introduced some quarterly variability in gross margin reporting, its long-term impact is expected to be positive for operational precision.

Complementing the ERP system, the Advancing Agility Automation (AAA) Initiative, approved in February 2024, is a multi-year productivity program designed to improve supply chain and manufacturing-related spend, optimize selling, general, and administrative (SG&A) expenses, and leverage new technology for process simplification and automation. This initiative is projected to incur pre-tax costs of $200 million to $250 million through 2026 but is expected to generate substantial ongoing annual savings of $350 million to $400 million upon its conclusion. As of June 29, 2025, $158.5 million in costs have been recognized, primarily for employee severance and technology implementation. These efforts contribute directly to cost leadership and operational efficiency, allowing Hershey to mitigate inflationary pressures and maintain competitive pricing.

Furthermore, Hershey's billion-dollar expansion plan for chocolate, nearing completion by early 2025, includes a new Reese's chocolate processing facility. This investment enhances the company's manufacturing agility and flexibility, providing stronger control over its supply chain through increased vertical integration. This is particularly crucial for key brands like Reese's, where past capacity was underdeveloped, and it enables the company to support even bigger innovation launches.

Innovation is a continuous focus, with levels significantly up compared to 2019. This is deemed "absolutely necessary" to compete for shelf space and deliver value. Recent product launches in 2025, such as Reese's Filled Pretzels, Reese's PB&J Big Cups, and Hershey's Kisses Cinnamon Toast Crunch flavored candies, demonstrate a commitment to new flavors and forms that resonate with consumers. The company is also proactively addressing regulatory changes, such as the FDA's intent to phase out petroleum-based synthetic dyes, by planning to remove all certified Food, Drug Cosmetic colors from its snacks by the end of 2027, a move not expected to have a material financial impact. Hershey is also monitoring emerging technologies like cellular agriculture as a potential long-term solution for cocoa alternatives. These technological and operational advancements collectively strengthen Hershey's competitive moat, contribute to its financial performance through cost reduction and market share gains, and support its long-term growth strategy.

Financial Performance: Navigating Headwinds with Strategic Resolve

The first half of 2025 presented a mixed financial picture for Hershey, as the company grappled with significant commodity cost inflation, particularly in cocoa, and the initial impacts of new tariffs. For the second quarter ended June 29, 2025, net sales surged by 26.0% to $2.61 billion, primarily driven by a 21.0% volume increase. This volume growth was attributed to planned inventory decreases in 2024 following the ERP system implementation, favorable Easter timing, and higher Halloween seasonal orders. Price realization also contributed positively, adding approximately 5.0% to sales. However, this top-line strength did not fully offset cost pressures. Gross profit declined by 4.5% to $796.3 million, and gross margin compressed by 970 basis points to 30.5%, mainly due to unfavorable cocoa costs and higher supply chain expenses.

For the first six months of 2025, net sales increased by a more modest 1.7% to $5.42 billion, driven by 3.0% favorable price realization, but partially offset by a 1.0% volume decrease, primarily in North America Confectionery, and unfavorable foreign currency impacts. The cumulative effect of higher commodity costs, unfavorable mark-to-market impacts from commodity derivatives, and an unfavorable product mix led to a substantial 1500 basis point decline in gross margin to 32.1% for the first half. Operating profit consequently decreased by 58.2% to $562.0 million, and net income fell by 70.7% to $286.9 million, resulting in diluted EPS of $1.41, down 70.6% from the prior year.

Despite these profitability pressures, Hershey maintains a solid liquidity position. As of June 29, 2025, cash and cash equivalents totaled $912.3 million, an increase of $181.6 million from year-end 2024. The company's total outstanding debt stood at $5.6 billion, with a manageable current portion of $303.0 million, including $300.0 million of notes due in August 2025. Hershey expects to meet its debt obligations through cash generated from operations, new debt issuance, or its $1.35 billion revolving credit facility. Capital expenditures are projected to be between $425 million and $450 million for 2025, returning to historical levels after the completion of the ERP system upgrade.

Segment performance highlights the company's strategic focus areas. North America Confectionery saw robust Q2 sales growth of 32.0%, driven by volume and pricing, though H1 segment income declined due to higher costs. North America Salty Snacks continued its strong momentum, with Q2 sales up 8.8% and segment income up 27.4%, fueled by Dot's Homestyle Pretzels and SkinnyPop. The International segment, while smaller, showed Q2 sales growth of 4.4% despite foreign currency headwinds, with strong performance in Reese's and share gains in Brazil and India.

Outlook & Strategic Initiatives: A Path to Balanced Growth

Hershey has updated its full-year 2025 adjusted EPS guidance, now projecting a decline of 36% to 38% (from a mid-30% decline previously), primarily due to an anticipated $170 million to $180 million in tariff expenses. This revised outlook reflects the company's transparent assessment of the current macroeconomic and geopolitical landscape.

Looking ahead to 2026, management expresses confidence in achieving "balanced top and bottom line growth," aiming to return to its "on-algorithm" earnings growth. This outlook is predicated on several key assumptions and strategic initiatives. While cocoa prices are still expected to be inflationary for 2026, management notes an improved supply-demand outlook, with a potential for further price declines in the second half of 2025 as production outside West Africa increases and global consumption falls. The company is actively pursuing a "full suite of levers" to manage cocoa costs, including strategic pricing, enhanced productivity from the AAA Initiative, and optimized marketing spend. Mid-teens pricing impact is expected for 2026, with approximately 80% of the profit benefit realized in that year.

Tariffs remain a significant variable. The unmitigated impact could be up to $100 million per quarter for Q3 and Q4 2025, with two-thirds related to cocoa and Canadian retaliatory tariffs. Hershey is actively engaging in discussions to secure exemptions, particularly for cocoa, given its non-U.S. origin. Supply chain optimization, including leveraging its agile network and cross-border opportunities, is a key mitigation strategy.

The company's innovation pipeline remains robust, with a major Reese's innovation expected in Fall 2025, anticipated to be the "biggest innovation ever on the brand." This, along with continued strength in seasonal businesses and expected low-single-digit growth in everyday CMG, is set to drive top-line momentum. Strategic acquisitions, such as Sour Strips (completed November 2024) and the pending LesserEvil, LLC deal (expected by end of 2025), are expanding Hershey's presence in high-growth salty snacks and sweets, targeting new demographics and occasions. The recent appointment of Kirk Tanner as CEO, effective August 18, 2025, brings extensive consumer packaged goods experience from PepsiCo (PEP) and Wendy's (WEN), with a focus on consumer and customer centricity, commercial acumen, and operational scale, ensuring continuity and renewed energy for the "snacking powerhouse" vision.

Conclusion

The Hershey Company stands at a pivotal juncture, demonstrating remarkable resilience and strategic foresight in the face of unprecedented commodity inflation and evolving market dynamics. Its deep-rooted brand equity, coupled with a proactive approach to innovation and operational excellence, positions it favorably for long-term value creation. While the immediate outlook for 2025 is tempered by significant tariff-related headwinds, the company's aggressive mitigation strategies, including strategic pricing and the transformative AAA Initiative, lay a clear path for margin recovery and a return to balanced top and bottom-line growth in 2026.

Hershey's commitment to expanding its "snacking powerhouse" vision through targeted acquisitions and a robust innovation pipeline in sweets and salty snacks is diversifying its revenue streams and strengthening its competitive standing against global peers. The new leadership under Kirk Tanner, supported by a strong management team, is poised to capitalize on these strategic foundations. For investors, Hershey represents a compelling opportunity to own a resilient consumer defensive leader with a clear roadmap for navigating current challenges and unlocking future growth, underpinned by its enduring brands and operational agility.