The Hershey Company HSY has faced challenges, with its stock dropping 11% over the past three months as it continues to be impacted by a more budget-conscious consumer base and historically high cocoa prices. During this period, HSY's stock has underperformed the broader industry, which saw a 7.6% decrease, as well as the Zacks Consumer Staples sector, which fell by 3.6%. In contrast, the S&P 500 saw a 6.2% increase over the same timeframe.

Let's take a closer look at the key factors negatively impacting Hershey’s performance.

Weak Consumer Trends Hurt HSY

Hershey is operating in a challenging environment, thanks to historically high cocoa prices and a stretched consumer base, which continues 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, which has reduced 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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Hershey’s Margins Under Pressure: Cost Concerns Persist

Hershey 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) on increased commodity costs, unfavorable timing of input costs, fixed cost deleverage and a negative mix. The adjusted operating profit of $654 million fell 13.2%, while the adjusted operating profit margin contracted 300 bps to 21.9% in the quarter.

Management expects its 2024 adjusted gross margin to decline by 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.

Challenging Road Ahead for HSY

Recently, Hershey lowered its 2024 guidance, reflecting an increasingly challenging landscape. In light of current consumer and channel pressures, the company expects its sales to be nearly flat year over year, down from the previous forecast of around 2% growth. The adjustment to the sales outlook is driven by a weaker-than-expected third-quarter performance, ongoing competitive and consumer pressures and lower-than-anticipated retailer inventory levels in key categories such as confectionery and salty snacks.

As a result of the reduced sales forecast, Hershey now projects its full-year adjusted EPS to decline by mid-single digits. This marks a revision from the earlier outlook, which anticipated only a slight decline in EPS.

What Should HSY Investors Do Next?

With Hershey facing ongoing pressures from high commodity costs, shifting consumer trends, and tight retail inventories, investors should stay cautious as the company adjusts its 2024 forecast. While the company’s strong brand and market presence provides resilience, near-term growth challenges may impact returns. Potential investors should assess HSY’s ability to navigate these challenges and manage margin pressures before making investment decisions. At present, the company carries a Zacks Rank #5 (Strong Sell).

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