Executive Summary / Key Takeaways

• Strategic Evolution Driving Growth: The Hershey Company is actively transforming into a "snacking powerhouse," expanding beyond its core confectionery into salty and better-for-you segments through strategic acquisitions and innovation, aiming for incremental consumers and occasions.
• Resilient Performance Amidst Headwinds: Despite significant commodity inflation, particularly in cocoa, and tariff pressures, Hershey delivered net sales growth in Q3 2025, driven by strategic pricing and strong performance in North America Salty Snacks and International segments.
• Technology as a Core Differentiator: Investments in advanced ERP systems, AI-enabled capabilities, and automation initiatives are yielding substantial operational efficiencies and supply chain agility, underpinning future margin recovery and innovation.
• Clear Path to 2026 Algorithm Growth: Management projects a return to its long-term algorithm for both top and bottom-line growth in 2026, supported by ongoing productivity savings, moderating cocoa inflation, and potential tariff relief, with flexibility for further brand investment.
• Competitive Strengths and Market Dynamics: Hershey leverages its iconic brand portfolio and innovation to maintain strong market positioning, particularly in North America, while adapting to evolving consumer preferences and channel shifts, including increased competition from private label and insurgent brands.

A Legacy Reimagined: Hershey's Evolution into a Snacking Powerhouse

The Hershey Company, founded in 1894, boasts a rich heritage rooted in confectionery. However, the company has strategically evolved, embarking on a vision in 2017 to become a "snacking powerhouse." This transformation aims to leverage Hershey's core capabilities to capture new consumers and occasions by expanding into white spaces such as sweets, better-for-you, and salty snacks. This strategic pivot is crucial in a dynamic consumer landscape, allowing Hershey to diversify its revenue streams and reduce its reliance on traditional chocolate.

This strategic direction has been underpinned by a series of calculated acquisitions and robust internal investments. In 2022, Hershey acquired Pretzels, Inc., followed by the purchase of two plants from Weaver Popcorn Manufacturing in 2023, significantly bolstering its salty snack production capabilities. Further expanding its portfolio, the company acquired the Sour Strips brand in November 2024, integrating it into the North America Confectionery segment to harness its brand-building expertise and commercial relationships. The strategic intent continued into 2025 with the purchase of the Fulfil brand in North America and the announced acquisition of LesserEvil, LLC, a producer of organic popcorn and puffed snack products, expected to close by year-end. This LesserEvil acquisition is particularly noteworthy as it establishes a "better-for-you platform" that can be extended and scaled across categories, reaching younger, more diverse demographics.

Technological Edge: Fueling Efficiency and Innovation

At the heart of Hershey's strategic evolution and its ability to navigate market complexities lies a significant commitment to technological differentiation and innovation. The company has invested heavily in a new ERP platform and AI/tech-enabled capabilities, which have been instrumental in driving "significant efficiency" across its operations. This foundational technology provides enhanced data visibility and streamlined processes, enabling more agile decision-making and resource allocation.

A key initiative is the "Advancing Agility Automation Initiative" (AAA Initiative), approved in February 2024. This multi-year productivity program is designed to improve supply chain and manufacturing efficiency, optimize selling, general, and administrative (SG&A) expenses, and leverage new technology for substantial long-term savings. The AAA Initiative is projected to incur total pre-tax costs of $200 million to $250 million through 2026, but is expected to generate "ongoing annual savings" of approximately $400 million at its conclusion in 2026. This quantifiable benefit directly contributes to margin recovery and enhances operational leverage.

Furthermore, Hershey's investment in a new Reese's chocolate processing facility underscores its commitment to vertical integration and supply chain control. This facility provides "more agility and flexibility across the network," ensuring "stronger control over our supply chain and more vertical integration." This strategic investment addressed previous "capacity constrained" issues, particularly in seasonal products and the Reese's brand, enabling "even bigger innovation" and higher growth. The company's R&D capabilities, supported by these technological advancements, also enable continuous "reformulations" to provide "the highest quality products at the best cost possible" without compromising taste profiles, a critical competitive advantage. Looking further ahead, Hershey is actively monitoring "cellular agriculture" as a "long-term solution" for cocoa, recognizing its potential as a "game changer," albeit not a near-term one. These technological investments collectively form a robust competitive moat, driving cost efficiency, supply chain resilience, innovation speed, and product quality, all vital for sustained financial performance and market leadership.

Financial Performance: Resilience Amidst Cost Pressures

Hershey's recent financial performance reflects a business demonstrating resilience in a challenging macroeconomic environment, marked by significant commodity inflation. For the three months ended September 28, 2025, net sales increased by 6.5% to $3.18 billion, and for the nine months, net sales rose by 3.4% to $8.60 billion. This growth was primarily driven by favorable price realization, approximately 6% in Q3 2025 and 4% for the nine months, across its segments. However, volume was only "slightly positive" in Q3 and saw a "volume decrease of approximately 1%" for the nine months, largely due to price elasticity impacts in North America Confectionery.

Profitability, however, faced considerable pressure. Gross margin decreased significantly, by 870 basis points to 32.6% in Q3 2025 and by 1270 basis points to 32.3% for the nine months. This decline was primarily attributed to "unfavorable commodity and tariff costs" and an "unfavorable mix," partially offset by net price realization, supply chain productivity, and savings from the AAA Initiative. Operating profit consequently decreased by 29.1% in Q3 2025 and 49.1% for the nine months, reflecting the lower gross profit and higher selling, marketing, and administrative (SMA) expenses.

Segmental Performance Highlights:

• North America Confectionery: Net sales increased by 5.6% in Q3 2025 to $2.62 billion, driven by approximately 7% favorable price realization. However, segment income decreased by 21.2% to $571.50 million due to higher commodity and tariff costs and unfavorable mix. The everyday Candy, Mint, and Gum (CMG) business showed strong momentum, growing "double digits in the last four weeks" of Q3 2025, and the core business (excluding REESE'S Oreo innovation) grew "close to 5%."
• North America Salty Snacks: This segment was a standout performer, with net sales increasing by 10% in Q3 2025 to $321 million, predominantly from a 11% volume increase driven by Dot's Homestyle Pretzels, SkinnyPop, and Pirate's Booty. Segment income rose by 6.9% to $57.70 million, benefiting from volume growth, AAA Initiative savings, and lower commodity costs.
• International: Net sales grew by 12.1% in Q3 2025 to $244.80 million, fueled by 7% favorable price realization and 6% volume growth in markets like Brazil, Europe, and Mexico. Despite sales growth, the segment reported a loss of $13.60 million in Q3 2025, a significant decline from income in the prior year, primarily due to "higher commodity and manufacturing costs."

Liquidity remains robust, with the company believing it has "sufficient liquidity to satisfy its key strategic initiatives and other material cash requirements." While net cash provided by operating activities decreased in the first nine months of 2025, this was partially offset by lower capital expenditures, as the ERP system upgrade was completed in 2024.

Competitive Landscape and Strategic Positioning

Hershey operates in a highly competitive landscape, primarily against large, diversified food and beverage companies such as Mondelez International (MDLZ), PepsiCo (PEP), General Mills (GIS), and The Kraft Heinz Company (KHC). Hershey's competitive edge is rooted in its "strong brand portfolio," particularly its iconic American heritage brands like Hershey's and Reese's, which foster deep customer loyalty and provide pricing power. The company's "cost leadership in manufacturing," supported by its advanced supply chain and automation, allows it to maintain competitive margins even against value-focused rivals.

In the U.S. confectionery market, Hershey maintains a leading position. The "U.S. category, CMG has been very resilient. It's been very rational," with management stating they are "not concerned about price gaps across the portfolio." While competitors like MDLZ boast greater international reach and PEP offers a broader product range, Hershey's focused strategy on premium and permissible snacking, coupled with its innovation engine, allows it to compete effectively. For instance, in salty snacks, brands like SkinnyPop and Dot's Homestyle Pretzels are leading their respective categories, leveraging a "permissible and premium halo" to drive growth ahead of the broader salty snack market. The company's innovation, such as the REESE'S Oreo Cup, is not only a top growth driver but also helps elevate core brands through co-merchandising.

However, vulnerabilities exist. Hershey faces "supply chain dependencies," particularly concerning cocoa, which can significantly impact costs. Its "narrower product portfolio" compared to conglomerates like PEP exposes it to threats from competitors leveraging diversified offerings or health trends. The company actively responds by focusing on innovation in sweets (e.g., Jolly Rancher Ropes, Sour Strips) and better-for-you options (LesserEvil acquisition) to expand its reach and mitigate these risks. The decision to remove synthetic dyes by 2027 also positions Hershey to align with evolving consumer preferences and regulatory shifts, potentially turning a compliance challenge into a competitive advantage.

Outlook and Guidance: A Path to Algorithm Growth

Hershey's management is focused on a clear path to recovery and long-term sustainable growth. For 2026, the company anticipates "balanced top-and-bottom-line growth," with the objective of returning EPS to its long-term algorithm of 2% to 4% revenue growth. This outlook is underpinned by several key assumptions and strategic initiatives.

Despite recent moderation, cocoa costs are expected to remain inflationary in 2026 compared to historical levels, though the "level of inflation is moderating." Hershey has modeled an "incremental $200 million on tariffs" for 2026, but management expresses optimism for potential relief through ongoing trade negotiations, particularly concerning cocoa. The company's elasticity assumption for 2026 is planned at "-1," a "center cut" approach that accounts for a challenging consumer environment, even though current elasticity has been "running a bit better" than expected.

The AAA Initiative is a critical component of the 2026 outlook, with expected annual savings of approximately $400 million at its conclusion. Capital expenditures for 2025 are projected to be around $425 million, at the lower end of the previously estimated range, as the ERP system upgrade was completed in 2024. Management emphasizes a long-term approach, stating they "retain the flexibility to invest in our business" and brands, while simultaneously working to restore gross margins over several years. While "above algorithm performance is definitely on the table" for EPS, contingent on cocoa and tariff developments, the core focus remains on achieving consistent, sustainable growth.

Risks and Challenges

Several risks could impact Hershey's trajectory. The "persistent dynamic macroeconomic environment," characterized by "increasing inflationary pressures" and "price volatility for select commodities," remains a significant challenge. Cocoa prices, while moderating, are still "70% higher than it was in 2023," and the outlook remains "uncertain due to significant liquidity and volatility events." Changes in "global trade policies, including tariffs on U.S. imports," pose a material risk, with an "unmitigated impact [that] could be up to $100 million per quarter for quarter three and quarter four" in 2025.

Regulatory shifts, such as the FDA's phasing out of petroleum-based synthetic dyes by 2027, necessitate product reformulation, although the estimated costs are "not expected to have a material impact." The "weak consumer" environment, while not significantly impacting Hershey's resilient categories, remains a factor to monitor. Seasonal performance, as evidenced by a "somewhat soft" Halloween in 2025, also presents opportunities for continuous improvement in product lineup and marketing strategies. Despite these challenges, management's proactive stance on mitigation, including strategic pricing, supply chain optimization, and innovation, aims to buffer these impacts.

Conclusion

The Hershey Company stands at a pivotal juncture, strategically transforming its business model while confronting significant external pressures. Its deliberate pivot to a "snacking powerhouse," underpinned by targeted acquisitions and a robust innovation pipeline, positions it for diversified growth beyond its traditional chocolate core. Crucially, Hershey's sustained investment in advanced technology, including its ERP system, AI-enabled capabilities, and the Advancing Agility Automation Initiative, provides a formidable competitive advantage, driving operational efficiencies and supply chain resilience essential for long-term margin recovery.

While the near-term outlook is shaped by persistent cocoa inflation and tariff headwinds, management's clear guidance for a return to "on-algorithm earnings growth" and "balanced top-and-bottom-line growth" in 2026 signals confidence in its strategic responses. The company's iconic brands, coupled with its technological leadership and disciplined capital allocation, reinforce its competitive moat. Investors should recognize Hershey's strategic agility and commitment to long-term value creation, as the company leverages its foundational strengths to navigate market shifts and unlock its full potential in the evolving global snacking industry.