The Hershey Company HSY has faced significant challenges, including rising commodity costs and changing consumer behavior, which have impacted its profitability. As a result, the stock has dropped 13.9% over the past three months, underperforming both the broader industry and the Zacks Consumer Staple sector, which saw declines of 11% and 5.4%, respectively. In contrast, the S&P 500 has gained 11.1% during the same period. With these hurdles in mind, investors are questioning Hershey’s prospects as they weigh the factors behind its recent struggles.

Slowing Consumer Demand Hurts HSY

The most significant factor weighing on Hershey’s performance is the weaker-than-expected consumer demand. 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.

The shift in consumer shopping habits toward club stores, dollar stores and online channels —areas where Hershey has less presence — is adding to the company’s challenges. Tighter inventory management by retailers is also affecting its North America Confectionery and Salty Snacks segments. The company is also facing heightened competition across all of its product categories.

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.

HSY Stock Price Performance

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HSY’s Margin Under Pressure From Rising Costs

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 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.

HSY’s Guidance Cut Reflects Uncertainty

Amid ongoing challenges, Hershey has revised its 2024 outlook, now expecting flat sales growth instead of the previously forecasted nearly 2% increase. This adjustment is driven by weaker-than-expected third-quarter results, persistent consumer and competitive pressures, and lower-than-anticipated retailer inventory levels in key areas like confectionery and salty snacks. As a result, Hershey now projects its full-year adjusted EPS to decline by mid-single digits, a more significant drop than the earlier forecast, which expected only a slight decline.

Final Words on Hershey

Given Hershey’s ongoing challenges with rising costs, weak consumer demand and declining margins, investors should proceed with caution in the short term. While the company’s strong brand and market leadership provide long-term potential, the near-term outlook remains uncertain. With Hershey currently holding a Zacks Rank #5 (Strong Sell), it may be wise for investors to reassess their positions and wait for improvement before making further investment decisions.

Some Solid Food Picks

Ingredion Incorporated INGR manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions derived from wet milling and processing corn and other starch-based materials. The company currently sports a Zacks Rank #1 (Strong Buy). INGR has a trailing four-quarter earnings surprise of 9.5%, on average.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Ingredion’s current financial year’s earnings indicates growth of 12.4% from the year-ago reported number.

Freshpet Inc. FRPT manufactures, distributes and markets natural fresh meals and treats for dogs and cats. It currently carries a Zacks Rank #2 (Buy). FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.

The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings implies growth of 27.3% and 228.6%, respectively, from the prior-year reported levels.

US Foods Holding Corp. USFD, together with its subsidiaries, engages in the marketing, sale and distribution of fresh, frozen and dry food and non-food products to foodservice customers in the United States. It currently carries a Zacks Rank #2. USFD delivered an earnings surprise of 3.7% in the last reported quarter.

The Zacks Consensus Estimate for US Foods Holding’s current fiscal-year sales and earnings indicates growth of 6.4% and 18.6%, respectively, from the prior-year reported levels.

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Hershey Company (The) (HSY) : Free Stock Analysis Report

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