Costs take a bite out of Hershey's bottom line

Hershey's stock has declined over 8% following the company's reduced full-year guidance for 2026 and rising cocoa futures, which have surged by 11%, reflecting significant challenges from increased manufacturing costs and declining sales volumes.

The company expects a drastic profit drop of 36% to 38% compared to the previous year due to rising commodity prices, despite plans to raise prices and a projection of at least a 2% sales increase.

Cocoa price stabilization is not expected soon, as major cocoa-producing nations face adverse weather, aging trees, and diseases, further complicating Hershey's ability to manage costs and maintain profit margins.

Analysts express skepticism regarding Hershey's ability to raise prices without negatively impacting sales volumes, suggesting that the market may be overly optimistic about the company’s future earnings recovery.

Recommendation Rating: Caution Advised for Hershey Investors

Following the release of its second-quarter financial results, Hershey (NYSE:HSY) has faced significant investor backlash, resulting in a stock decline for five consecutive sessions and erasing over 8% of its market value. This downturn can be attributed to the company's reduced full-year 2026 guidance, an 11% surge in cocoa futures, and a momentary increase in cocoa bean prices that exceeded $8,500 per metric ton.

Recently, Hershey adjusted its profit expectations for the year due to anticipated challenges from rising commodity prices, increased manufacturing expenses, and declining sales volumes. Although the firm plans to raise prices and projects at least a 2% increase in sales, it forecasts a staggering drop in profits, anticipated to fall by 36% to 38% compared to the previous year.

CFO Steven Voskuil remarked during the second-quarter earnings call, "While the price increase is significant, it does not fully account for the cocoa inflation we've experienced up to 2025."

Analyst Luca Socci commented, "Some may argue we should focus on 2026 instead of 2025. However, given the unpredictable outlook for commodities, the only factor that might offer reassurance is the possibility of easier comparisons in 2026. Still, this doesn't guarantee higher profits or renewed growth for Hershey." He further emphasized that the company's narrative cannot solely rely on the stabilization of cocoa prices.

Unfortunately, cocoa price stabilization does not seem imminent. The top cocoa-producing countries—Ivory Coast, Ghana, Nigeria, and Cameroon—are grappling with significant challenges such as adverse weather conditions, aging cocoa trees, and various tree diseases, which collectively produce over two-thirds of the global cocoa supply.

The heightened cocoa prices pose substantial risks for processors, including the necessity for increased capital to purchase and store beans, heightened risk exposure, and a growing demand for higher profit margins in futures hedges. As consumer spending decreases, traders become increasingly hesitant to invest in futures contracts, exerting additional pressure on market prices.

According to a cocoa trader quoted in The Wall Street Journal, "There’s really no compelling reason to buy cocoa at current prices; it’s more practical to purchase on an as-needed basis."

Even with a notable 30% drop in cocoa futures prices from their November 2024 peak of $11,882 per metric ton, the current cocoa futures market remains over four times higher than prices observed in 2022.

Compounding the volatility in commodity pricing, analyst Vladimir Dimitrov warns that "it seems very likely the market is overestimating Hershey's capacity to raise prices further without negatively impacting sales volumes." He anticipates that any potential earnings recovery for Hershey in the fiscal year 2026 may face further delays.