Hershey’s Stock Struggles Amid Challenging Market Conditions
The Hershey Company HSY has seen its stock fall by 11% in the last three months. The drop is largely due to consumers being more price-sensitive and cocoa prices being at record highs. During this same timeframe, HSY’s stock lagged behind the wider industry, which dropped 7.6%, and the Zacks Consumer Staples sector, which decreased by 3.6%. Conversely, the S&P 500 index rose by 6.2% during this period.
To understand the factors at play, let’s delve deeper into the issues affecting Hershey’s performance.
Consumer Spending Shifts Impact Hershey
Hershey is navigating a tough environment influenced by soaring cocoa prices and a consumer base that is tightening its budget. In the third quarter of 2024, total snacking consumption declined as individuals prioritized value in their purchases, focusing on essential meals. Economic pressures have led consumers to seek bargains, resulting in less foot traffic in convenience and drug stores where Hershey brands traditionally perform well.
Adding to the challenge, shoppers are moving towards club, dollar, and online channels, where Hershey has less presence. This shift, combined with stricter inventory practices at retailers, is affecting Hershey’s sales in North America, particularly in the Confectionery and Salty Snacks divisions. The company is also facing heightened competition across various product lines.
Consequently, Hershey’s net sales fell by 1.4% in the third quarter. Although price increases helped mitigate some losses, they were not enough to counterbalance the decrease in sales volume. Challenges like stagnant consumption trends, lower retailer inventories, and delays in seasonal shipments played a part. Adjusted earnings per share (EPS) for the quarter dropped by 10% due to the lower sales and declining gross margins.
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Rising Costs Pressure Hershey’s Profit Margins
In addition, Hershey’s profit margins remain under strain, a trend that continued into the third quarter of 2024. The adjusted gross margin stood at 40.3%, a decline of 460 basis points (bps) attributed to rising commodity costs, unfavorable input cost timing, fixed cost difficulties, and a negative product mix. The adjusted operating profit reached $654 million, down 13.2%, while the adjusted operating profit margin shrank by 300 bps to 21.9% for the quarter.
Looking ahead, management projects that the adjusted gross margin for 2024 will decline by nearly 250 bps. This prediction takes into account a combination of factors: expected reductions in sales volume, ongoing mix challenges regarding products and channels, and sustained inflation affecting key ingredients such as cocoa and sugar. The tightening margins are likely to negate any gains from price increases and improvements in supply chain efficiency.
Hershey Faces Tough Forecast Ahead
Hershey has recently revised down its guidance for 2024, indicating the increased difficulties ahead. The company now anticipates that its sales will be flat year-over-year, contrasting sharply with previous expectations of around 2% growth. This downward adjustment resulted from a weaker-than-expected performance in the third quarter and ongoing competitive pressures alongside lower retailer stock levels in critical categories such as confectionery and salty snacks.
The new sales outlook leads Hershey to predict a mid-single-digit decline in adjusted EPS for the full year. This is a significant change from its earlier forecast, which suggested only a slight dip in EPS.
Guidance for Hershey Investors
Considering Hershey is contending with high commodity costs, evolving consumer habits, and tight retail inventories, investors should proceed cautiously as the company re-evaluates its 2024 projections. Though Hershey possesses strong brands and a solid market presence, immediate growth obstacles might affect returns. Potential investors need to consider how well HSY can handle these challenges and maintain its profit margins before deciding on any investments. Currently, the company holds a Zacks Rank #5 (Strong Sell).
Explore Promising Alternatives
Sprouts Farmers SFM focuses on fresh, natural, and organic food products and enjoys a Zacks Rank #1 (Strong Buy). Over the last four quarters, SFM has averaged a 15.3% earnings surprise. Its consensus estimates indicate sales growth of 12.2% and earnings growth of 29.6% compared to last year.
McCormick & Company MKC is a global leader in food products, particularly spices and seasonings, with a Zacks Rank #2 (Buy). MKC has shown an average earnings surprise of 13.8% in its last four quarters, with expected growth of about 0.6% in sales and 8.2% in earnings year over year.
Freshpet FRPT specializes in natural meals and treats for pets and also holds a Zacks Rank #2. Freshpet has shown a remarkable average earnings surprise of 144.5% in its last four quarters, with sales and earnings projected to grow by 27.3% and 224.3% respectively from last year.
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The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
