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The Hershey Company’s HSY stock has taken a hit recently, with a 11.8% drop over the past three months compared with the industry’s decline of 9.3%. The iconic chocolate maker is facing an increasingly tough environment, marked by rising commodity costs and shifting consumer behavior.
Hershey reported a decline in net sales and earnings for the third quarter, causing it to lower its 2024 guidance. This weaker outlook, caused by high cocoa prices and a budget-conscious consumer base, has raised concerns about the company’s ability to weather these pressures in the coming months.
Challenges Facing Hershey in 2024
Hershey is operating in a challenging environment, thanks to historically high cocoa prices and a stretched consumer base, which continue to pressure its results. Total snacking consumption softened in the third quarter of 2024 as people prioritized value and budgeted for meals. Consumer behavior has shifted toward value-seeking due to economic pressures, prioritizing budgets for essentials, reducing foot traffic to convenience and drug stores where Hershey’s brands are over indexed.
In addition, shopping shifts to club, dollar and online channels — where the company’s products are less developed — are further complicating matters. Tighter inventory management by customers is impacting North America Confectionery and North America Salty Snacks. Hershey is also facing increased competition across all product segments.
Thanks to these factors, the company’s third-quarter net sales declined 1.4%, with price increases partially offset by volume declines. This underperformance was driven by soft consumption trends, reduced retailer inventories and seasonal shipment delays. Quarterly adjusted earnings per share (EPS) fell 10% on lower sales and declining gross margins.
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Persistent Margin Pressure for Hershey
The company is grappling with continued margin pressure, a trend that extended into the third quarter of 2024. The adjusted gross margin was 40.3%, which contracted 460 basis points (bps). This decline was caused by increased commodity costs, unfavorable timing of input costs, fixed cost deleverage and a negative mix, which offset gains from price realization and productivity improvements.
In addition, the adjusted operating profit of $654 million fell 13.2% year over year while the adjusted operating profit margin contracted 300 bps to 21.9%. The downside was caused by increased commodity costs, unfavorable timing of input costs, fixed cost deleverage and negative product mix.
Looking ahead, Hershey expects its 2024 adjusted gross margin to decline nearly 250 bps. This projection reflects a combination of factors, including a reduced volume outlook, persistent channel and product mix challenges and the continued impact of inflation on key ingredients like cocoa and sugar. These pressures are expected to offset any benefits from price realization and supply-chain productivity improvements.