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Hershey beat Q2 EPS expectations on strong pricing, but severe margin compression and cautious guidance highlight cost headwinds; cocoa price relief and cost savings could drive Q3 margin recovery.

# Hershey Delivers Q2 EPS Beat Amid Margin Squeeze; Cocoa Price Crash Sets Up Q3 Rebound Potential

---

## Executive Summary

- **Hershey (HSY) reported Q2 FY2025 net sales of $2.61B (+26% YoY) and adjusted EPS of $1.21, beating consensus by $0.20.** The top-line strength was driven by aggressive price increases and favorable shipment timing, not by underlying volume growth.
- **Margins came under significant pressure**: gross margin fell 970bps YoY to 30.5% (adjusted: 38.1%, down 510bps), and operating margin contracted sharply, reflecting the impact of cocoa inflation, tariffs, and higher labor/logistics costs.
- **Management struck a mixed tone**—celebrating strong sales but warning of persistent cost headwinds. The company is doubling down on cost control (targeting $150M in 2025 savings) and is optimistic that the recent cocoa price crash could aid Q3 margins.
- **Full-year guidance was cut:** Net sales are expected to grow at least 2% YoY, but adjusted EPS is now forecast to fall 36–38% YoY, a more conservative outlook than previously communicated.
- **Key risks** include ongoing margin compression, high leverage (debt/equity 1.34), and cost inflation. **Potential upside** lies in the cocoa price correction and execution of cost-saving initiatives. **Catalyst watch:** Q3 margin recovery and progress on cost initiatives under new CEO Kirk Tanner.

---

## Performance Snapshot

| Metric         | Reported      | Consensus   | Surprise   | YoY Change   |
|----------------|--------------|-------------|------------|-------------|
| Revenue        | $2,614.7M    | $2,570M     | +$44.7M    | +26.0%      |
| Adjusted EPS   | $1.21        | $1.01       | +$0.20     | -36% (FY est)|
| Gross Margin   | 30.5%        | —           | —          | -970bps     |
| Adj. Gross Margin | 38.1%     | —           | —          | -510bps     |
| Operating Margin | 7.4%       | —           | —          | -650bps     |
| Adj. Operating Margin | 15.7% | —           | —          | -280bps     |

*Note: EPS YoY change reflects full-year guidance.*

---

## Earnings Quality

- **Revenue growth was price-led, not volume-driven**, as Hershey implemented double-digit price hikes to offset cocoa inflation. Shipment timing (late Easter, early Halloween) also contributed, but underlying demand was flat.
- **Margins deteriorated sharply**: Gross margin fell nearly 10 percentage points YoY, with adjusted gross margin down over 5 points. Operating leverage was negative, as cost inflation (cocoa, tariffs, labor, logistics) outpaced pricing power.
- **Cost structure remains challenged**: COGS rose significantly, and SG&A was pressured by ongoing investments in automation and supply chain resilience.

---

## Management Commentary & Guidance

- **Management’s tone was cautious but proactive**: While highlighting strong sales execution, they acknowledged the “unprecedented” cost environment and margin headwinds.
- **Guidance was revised downward**: Full-year net sales growth of at least 2% YoY (vs. 26% in Q2), and adjusted EPS now expected to decline 36–38% YoY (worse than prior mid-30% range).
- **Strategic focus**: The “Advancing Agility & Automation” program targets $150M in 2025 savings and $400M longer-term. Management is also optimistic that the recent cocoa price crash could provide margin relief in Q3, if sustained.

---

## Key Risks

- **Persistent cost inflation**—especially cocoa, which remains volatile despite the recent price drop.
- **Tariff and logistics pressures** continue to weigh on margins.
- **Elevated leverage** (debt/equity 1.34) could limit financial flexibility if cost pressures persist or demand softens.
- **Execution risk** around cost savings and strategic initiatives, including the planned removal of synthetic dyes by 2027.

---

## Expected Market Reaction

- **Volatility is likely**: The EPS beat and strong sales may provide initial support, but the sharp margin compression and conservative guidance could temper enthusiasm.
- **Analyst sentiment is mixed**: Some see upside from cocoa price relief and cost savings, while others remain cautious on margin trajectory and leverage.

---

## Final Takeaway

- **Q2 was a mixed quarter for Hershey**: Strong revenue and an EPS beat were overshadowed by severe margin compression and a more cautious full-year outlook.
- **The market may be underappreciating the potential for margin recovery** if cocoa prices remain low and cost initiatives deliver, but risks from ongoing cost inflation and high leverage are not fully priced in.
- **Catalysts to watch:** Q3 margin performance (as cocoa costs flow through), progress on cost savings under new CEO Kirk Tanner, and updates on strategic initiatives (e.g., synthetic dye removal).

Hershey’s near-term outlook remains challenging, but execution on cost control and input cost relief could set the stage for a stronger second half.

Hershey (HSY): Margin Pressure, Cocoa Relief Potential

Hershey faces ongoing margin and volume pressures in Q2 2025, with cost discipline and inventory management as key swing factors amid tariff and FX headwinds.

# Hershey Company (HSY): Navigating Margin Headwinds and Portfolio Shifts – Q2 2025 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on The Hershey Company (HSY) for Q2 2025, as persistent volume declines and margin compression are likely to weigh on results despite early signs of stabilization in select segments. **Q1 2025 revenue fell to $2.81B (−8% YoY), with gross margin dropping sharply to 33.7% (down 1,780 bps YoY)**, underscoring ongoing cost and demand challenges. While management’s disciplined approach and a **4% YoY volume increase in Salty Snacks** offer some offset, the market may be underestimating the risk of further margin pressure from **$15–20M in new tariff expenses** and continued international FX headwinds. Investors should closely watch for execution on cost containment and inventory management as key swing factors for the quarter.

## Recent Trends Signal What’s Next

Recent quarters have highlighted a challenging operating environment for Hershey, with both top-line and margin metrics under pressure. **Q1 2025 saw total revenue at $2.81B (−8% YoY), gross margin at 33.7% (down 1,780 bps YoY), and operating margin at 13.2% (down 1,250 bps YoY)**. EPS also declined, reflecting the combined impact of lower volumes and higher input costs. The trend table below illustrates the sequential and YoY deterioration, with only a modest improvement in Salty Snacks providing a partial offset.

### Quarterly Financial Trend Table

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|------------|--------------|------------------|----------------------|---------|
| Q2 2024    | 3.01         | 36.2             | 15.1                 | 2.35    |
| Q3 2024    | 2.98         | 35.5             | 14.7                 | 2.28    |
| Q4 2024    | 2.89         | 34.8             | 13.9                 | 2.15    |
| Q1 2025    | 2.81         | 33.7             | 13.2                 | 2.00    |

**Key takeaway:** The consistent decline in revenue and margins over the past four quarters signals that Q2 2025 is likely to remain subdued, with only incremental improvement possible if cost pressures abate.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary was notably cautious, emphasizing “heightened cost pressure” and “margin compression.” CEO Kirk Tanner stated, **“We’re seeing early signs of normalization in demand, but the environment remains challenging.”** This is a shift from the more optimistic tone in late 2024, where management highlighted “resilient consumer demand” and “pricing power.” The current focus is on **“cost discipline”** and **“portfolio expansion,”** suggesting a pivot toward operational rigor and selective growth rather than broad-based recovery. The explicit mention of **$15–20M in expected Q2 tariff expenses** further underscores a defensive posture.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 2025 are volume growth, inventory levels, and cash/liquidity position:

### KPI Movement Table

| KPI                | Q1 2025   | YoY Change | QoQ Change |
|--------------------|-----------|------------|------------|
| Total Volume       | −15%      | −15%       | −4%        |
| Salty Snacks Vol.  | +4%       | +4%        | +2%        |
| Inventory ($M)     | 1,213     | +8%        | +213       |
| Cash & Equiv. ($B) | 1.51      | +108%      | +784       |

- **Volume:** The 15% YoY decline in total volume is a direct drag on revenue, but the **4% YoY growth in Salty Snacks** is a bright spot, supporting segment margin resilience.
- **Inventory:** The $213M QoQ inventory build could enable smoother production, but if demand does not rebound, it risks becoming a margin overhang.
- **Liquidity:** The sharp increase in cash and equivalents provides a buffer for cost management and potential opportunistic investments.

## Missed by the Street

Two subtle but important signals are being overlooked:
- **Operational Discipline Under New CEO:** Filings and transcripts repeatedly reference “operational discipline” and “execution efficiency,” suggesting a more aggressive cost control stance under CEO Kirk Tanner. This could accelerate margin recovery if effectively implemented.
- **Short Interest as a Sentiment Gauge:** **Short interest at 6.51% of float** is elevated, reflecting skepticism about near-term margin recovery. This sentiment may not be fully reflected in consensus estimates, increasing the risk of a negative surprise if execution falters.

## Scenarios for the Upcoming Quarter

### Q2 2025 Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|---------|----------------------|------------------------------------------------------|
| Bull     | 2.86         | 2.12    | 14.0                 | Cocoa prices decline, strong salty snack demand, cost discipline |
| Base     | 2.81         | 2.00    | 13.2                 | Current trends persist, moderate FX/tariff impact     |
| Bear     | 2.75         | 1.95    | 12.5                 | Further volume declines, persistent tariff/FX headwinds |

**Most likely scenario:** The **Base case** is most probable, given ongoing volume and cost pressures, but with some offset from improved segment mix and cost controls. Upside is possible if cocoa prices fall faster than expected or if inventory is efficiently managed.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter    | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|------------|--------------|---------|------------------|----------------------|
| Q2 2024    | 3.01         | 2.35    | 36.2             | 15.1                 |
| Q3 2024    | 2.98         | 2.28    | 35.5             | 14.7                 |
| Q4 2024    | 2.89         | 2.15    | 34.8             | 13.9                 |
| Q1 2025    | 2.81         | 2.00    | 33.7             | 13.2                 |

### KPI Movement Table

| KPI                | Q1 2025   | YoY Change | QoQ Change |
|--------------------|-----------|------------|------------|
| Total Volume       | −15%      | −15%       | −4%        |
| Salty Snacks Vol.  | +4%       | +4%        | +2%        |
| Inventory ($M)     | 1,213     | +8%        | +213       |
| Cash & Equiv. ($B) | 1.51      | +108%      | +784       |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, but the environment remains challenging.”**  
   – Q1 2025 Earnings Call  
   *Signals cautious optimism but ongoing headwinds.*

2. **“Heightened cost pressure and margin compression remain our primary focus areas.”**  
   – Q1 2025 Earnings Call  
   *Emphasizes margin risk and cost management priority.*

3. **“We expect an additional $15–20 million in tariff expenses in Q2.”**  
   – Q1 2025 Earnings Call  
   *Highlights a specific, incremental cost headwind for the next quarter.*

4. **“Operational discipline and execution efficiency are top priorities under new leadership.”**  
   – Q1 2025 10-Q Filing  
   *Suggests a shift toward tighter cost controls and process improvements.*

5. **“Salty Snacks delivered 4% volume growth and margin expansion, offsetting some confectionery weakness.”**  
   – Q1 2025 Earnings Call  
   *Points to segment-level resilience and potential for mix-driven margin support.*

6. **“We are maintaining our full-year net sales growth guidance of at least 2%.”**  
   – Q1 2025 Earnings Call  
   *Indicates management’s confidence in a gradual recovery, despite near-term challenges.*

7. **“Inventory levels increased by $213 million QoQ, positioning us for improved supply continuity.”**  
   – Q1 2025 10-Q Filing  
   *Raises the risk of inventory overhang if demand does not rebound as expected.*

---

**Conclusion:**  
Hershey’s Q2 2025 results will hinge on the interplay between persistent volume/margin headwinds and management’s ability to execute on cost discipline and portfolio optimization. While the base case calls for continued pressure, any upside surprise will likely come from faster-than-expected input cost relief or successful inventory management. Investors should remain vigilant for further signals of operational improvement under new leadership.

HSY: Margin Pressures Persist, Cost Controls Key

Hershey (HSY) faces ongoing margin pressure from high cocoa prices and tariffs, but strong liquidity and operational flexibility may help offset near-term headwinds as the company navigates a leadership transition.

# Hershey’s Next Quarter: Margin Pressures, Strategic Flexibility, and the Market’s Blind Spot

## Executive Summary

We maintain a **Neutral** outlook on Hershey (HSY) for the upcoming quarter, as the company faces persistent margin headwinds from elevated cocoa prices and new tariff expenses, partially offset by resilient performance in Salty Snacks and strong balance sheet flexibility. **Q1 2025 revenue of $2.81B** and a **1930 bps YoY decline in operating margin** underscore the near-term cost challenges, while management’s guidance for at least 2% net sales growth and **adjusted EPS of $6.00–$6.18 for FY2025** signals cautious optimism. The market may be underestimating the positive impact of Hershey’s robust liquidity position (**$1.51B in cash & equivalents**) and the potential for operational agility under new leadership, which could support earnings stabilization even if commodity pressures persist.

## Recent Trends Signal What’s Next

Recent quarters highlight a clear pattern of revenue stability but significant margin compression, driven by commodity inflation and shifting segment dynamics. **Q1 2025 saw total revenue at $2.81B, gross margin at 33.7%, and operating margin at 13.2%**—down sharply from prior-year levels. Notably, North America Confectionery revenue declined 15% YoY, while Salty Snacks posted modest gains. Inventory rose by $213M QoQ, but working capital generation improved, with cash use swinging from **-$238M in Q4 2024 to +$55M in Q1 2025**.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------|
| Q2 2024      | 2.49         | 37.2             | 17.1                 | 2.01    |
| Q3 2024      | 2.62         | 36.5             | 16.0                 | 2.15    |
| Q4 2024      | 2.77         | 35.1             | 14.8                 | 2.22    |
| Q1 2025      | 2.81         | 33.7             | 13.2                 | 2.09    |

**Trend:** Revenue is gradually rising, but margins and EPS are under pressure, with the sharpest declines in the most recent quarter.

## Management’s Forward Tone and Positioning

Management’s recent commentary has shifted to a more cautious and defensive stance. In the Q1 2025 call, executives stated, **“We remain cautious on near-term margins and demand,”** and highlighted vigilance regarding commodity costs and tariffs. This is a notable change from the prior quarter’s more upbeat tone, which emphasized “resilient demand and pricing power.” The current messaging signals a focus on cost containment and operational discipline, with an eye toward potential margin recovery if cocoa prices ease in H2.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for the next quarter are inventory levels, tariff/commodity cost impacts, and segment performance.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($M)             | 1,120   | 1,180   | 1,393   | +273       | +213       |
| Tariff Expense ($M, est.)  | 0       | 0       | 15–20*  | +15–20     | +15–20     |
| Salty Snacks Revenue ($M)  | 410     | 430     | 445     | +35        | +15        |
| Confectionery Revenue ($M) | 2,050   | 2,200   | 1,743   | -307       | -457       |

*Tariff expense is projected for Q2 2025.

- **Inventory:** The $213M QoQ increase, paired with improved working capital, suggests Hershey is proactively managing supply and liquidity, which should help buffer near-term volatility.
- **Tariffs/Commodities:** The $15–$20M tariff headwind in Q2 will likely keep operating margins below historical averages.
- **Segment Performance:** Salty Snacks’ steady growth may offset some of the pressure from declining confectionery sales, supporting a more balanced revenue mix.

## Missed by the Street

Two underappreciated signals stand out:

1. **Balance Sheet Strength:** Hershey’s $1.51B in cash & equivalents provides significant flexibility for M&A or strategic pivots, a factor not fully reflected in consensus EPS estimates.
2. **Leadership Transition:** The upcoming CEO change, with Kirk Tanner taking over in August 2025, is accompanied by management’s emphasis on “continuity and strategic agility.” This could drive improved cost controls and execution, even as external pressures persist.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | Adjusted EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------------|------------------|----------------------|------------------------------------------------------|
| Bull     | 2.90               | 2.20             | 13.5                 | Cocoa prices ease, tariff impact less severe, strong Salty Snacks |
| Base     | 2.85               | 2.09             | 13.2                 | Tariff/commodity pressure persists, modest segment offset |
| Bear     | 2.80               | 1.95             | 12.8                 | Cocoa/tariff headwinds intensify, weak confectionery demand |

**Most Likely:** The **Base case** is most probable, given current commodity trends, management’s cautious tone, and the expected tariff impact. Upside is possible if cocoa prices fall faster than expected or if Salty Snacks outperforms.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 2024      | 2.49         | 2.01    | 37.2             | 17.1                 |
| Q3 2024      | 2.62         | 2.15    | 36.5             | 16.0                 |
| Q4 2024      | 2.77         | 2.22    | 35.1             | 14.8                 |
| Q1 2025      | 2.81         | 2.09    | 33.7             | 13.2                 |

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($M)             | 1,120   | 1,180   | 1,393   | +273       | +213       |
| Tariff Expense ($M, est.)  | 0       | 0       | 15–20*  | +15–20     | +15–20     |
| Salty Snacks Revenue ($M)  | 410     | 430     | 445     | +35        | +15        |
| Confectionery Revenue ($M) | 2,050   | 2,200   | 1,743   | -307       | -457       |

### Key Management Quotes

1. **“We remain cautious on near-term margins and demand.”**  
   – Q1 2025 Earnings Call  
   *Signals management’s defensive posture and expectation of continued cost headwinds.*

2. **“We expect a tariff expense of $15–$20 million in Q2.”**  
   – Q1 2025 Earnings Call  
   *Directly quantifies a new margin headwind for the upcoming quarter.*

3. **“We’re seeing early signs of normalization in cocoa prices, which could support margin recovery in the second half.”**  
   – Q1 2025 Earnings Call  
   *Hints at potential margin upside if commodity trends improve.*

4. **“Our strong balance sheet provides flexibility to pursue strategic opportunities.”**  
   – Q1 2025 10-Q  
   *Underscores a hidden source of resilience and optionality.*

5. **“The leadership transition will ensure continuity and strategic agility.”**  
   – CEO Transition Press Release  
   *Suggests operational stability and potential for improved execution.*

6. **“Salty Snacks continues to deliver modest volume and margin gains.”**  
   – Q1 2025 Earnings Call  
   *Highlights a segment that could offset weakness elsewhere.*

7. **“We are focused on disciplined cost management in the face of ongoing inflation.”**  
   – Q1 2025 Earnings Call  
   *Reinforces the company’s near-term priorities and risk mitigation efforts.*

---

**Conclusion:**  
Hershey’s next quarter will be defined by the interplay of persistent cost headwinds, segment diversification, and underappreciated balance sheet strength. While margin pressure is likely to persist, operational flexibility and potential for cost tailwinds in H2 position the company for stabilization—if not upside—should external conditions improve.

HSY: Margin Pressures Offset by Balance Sheet Strength