The Hershey Company (HSY)

Executive Summary / Key Takeaways

• Hershey is poised for a 30-35% earnings recovery in 2026 as cocoa cost inflation eases, pricing actions fully flow through, and the AAA Initiative delivers $400 million in annual savings, reversing the 1380 basis point gross margin decline that defined 2025.

• The North America Salty Snacks segment has evolved into a double-digit growth engine with expanding margins, now representing 11% of sales and reducing Hershey's dependence on volatile cocoa-based confectionery while providing a platform for future acquisitions.

• Despite 70% cocoa price increases and up to $100 million quarterly tariff headwinds, Hershey's category leadership and pricing power remain intact, with everyday confectionery growing double-digits and the company gaining share in sweets, demonstrating the resilience of its brand moats.

• Management's capital allocation is returning to historical norms with $2.3 billion in operating cash flow funding normalized capex, debt reduction, and putting share repurchases back on the table for 2026, supported by a strong balance sheet with 70% of cash distributable from international subsidiaries.

• The critical variable for investors is execution of the new CEO's "next generation of growth" strategy, particularly whether Hershey can sustain salty snack momentum while managing the International segment's profit decline and navigating evolving tariff and SNAP policy risks.

Setting the Scene: A 130-Year-Old Brand Confronts Commodity Volatility

The Hershey Company, founded in 1894 by Milton S. Hershey and headquartered in Hershey, Pennsylvania, has spent 130 years building what may be the most defensible brand portfolio in American confectionery. The company generates over $11.6 billion in annual revenue by selling chocolate, sweets, mints, and salty snacks across 85 brand names in approximately 65 countries. This scale creates a distribution moat that few competitors can replicate, with Hershey's products occupying prime retail real estate in every major U.S. channel from convenience stores to mass retailers.

Confectionery operates as a duopoly in the United States, with Hershey and Mars controlling the vast majority of chocolate shelf space. This concentration creates pricing power that proves resilient even during inflationary periods. However, the business model carries a fundamental vulnerability: cocoa represents a massive cost input that the company cannot control. When cocoa prices surged 70% above 2023 levels in 2025, Hershey's gross margin moved from 47.3% to 33.5%—a 1380 basis point decline. This was a result of the commodity cycle. Hershey's brand strength determines how quickly it can recover when costs normalize.

Hershey's strategic response to this volatility defines the current investment case. Rather than simply accepting the commodity roller coaster, management has executed a deliberate portfolio transformation. The company acquired SkinnyPop's co-manufacturer in 2023, entered sour candy in late 2024, and purchased organic snack maker LesserEvil for $756 million in November 2025. These moves increased salty snacks from less than 10% of sales in 2023 to nearly 11% in 2025, while the segment's operating margins expanded from 14.5% to 19.0%. This creates a second growth engine that is less exposed to cocoa volatility and growing faster than the core confectionery business. If Hershey can continue building its salty snack platform while cocoa costs ease, the earnings recovery could be significant.

Technology, Products, and Strategic Differentiation: Beyond the Chocolate Bar

Hershey's competitive advantage rests on three pillars: brand equity that commands premium pricing, a distribution network that ensures ubiquitous availability, and manufacturing scale that drives cost efficiency. The company's core confectionery portfolio—led by Reese's, Hershey's, and KitKat (licensed)—generates 81% of revenue and maintains category-leading margins even during downturns. In 2025, despite significant cocoa inflation, everyday confectionery, mint, and gum (CMG) grew double-digits in the final weeks of Q3, and the company gained 100 basis points of share in sweets. This performance demonstrates that consumers remain loyal to trusted brands during inflation, preserving Hershey's pricing power for the recovery.

The salty snacks portfolio represents Hershey's most significant strategic evolution in decades. SkinnyPop has become the number one popcorn brand, Dot's Homestyle Pretzels is now the category leader, and Pirate's Booty offers white space in the puffs category. In 2025, this segment grew organic sales 18% in Q4 with double-digit volume growth, while segment income jumped 21.3% to $242 million. Salty snacks provide a natural hedge against confectionery's commodity exposure. Popcorn, pretzels, and puffed snacks use different raw materials, smoothing input cost volatility across the enterprise. Each percentage point of sales mix shift toward salty snacks reduces Hershey's earnings volatility while adding a growth driver that expands the addressable market.

Innovation serves as the connective tissue between these two engines. The Reese's Oreo launch created a cultural moment that drove category growth, while the protein portfolio (ONE Bar, Fulfil) positions Hershey in the functional snacking space. Management has increased R&D investment significantly versus 2019 levels, with a robust pipeline planned for 2026 and 2027. Innovation justifies premium pricing and creates new consumption occasions. New products are contributing to both volume growth and margin expansion in the salty segment.

Supply chain investments provide the operational foundation for this strategy. The company completed a multi-year ERP implementation in April 2024 and launched the Advancing Agility Automation (AAA) Initiative in February 2024, targeting $400 million in annual savings by 2026. A new Reese's chocolate processing facility adds capacity and flexibility, addressing previous seasonal constraints. These investments enable Hershey to capture demand more efficiently while reducing waste. When cocoa costs normalize, these productivity gains are expected to flow to the bottom line, amplifying the earnings recovery.

Financial Performance & Segment Dynamics: The 2025 Reset

Hershey's 2025 financial results show margin compression that is beginning to reverse. Net sales grew 4.4% to $11.7 billion, driven by 6% favorable pricing that more than offset a 1% volume decline. This pricing power is notable given the inflationary environment. However, cost of sales surged 31.7%, with $737 million in higher commodity costs and $491 million in mark-to-market derivative losses impacting gross margin. Operating profit was $1.7 billion, and net income was $883 million. The 2025 period represents a challenging point in the commodity cycle, and management's guidance implies a 500+ basis point gross margin recovery in 2026. Hershey's earnings decline was driven by external factors rather than competitive erosion.

Segment performance reveals the dual engine thesis in action. North America Confectionery generated $9.5 billion in sales (81% of total) but saw segment income fall 15.3% to $2.5 billion as margins compressed from 34.2% to 26.3%. This was driven by cocoa and tariff costs; underlying volume trends remain healthy with everyday CMG growing double-digits and retail takeaway accelerating to 6.7% in Q2 2025. When input costs ease, this segment is positioned to deliver both margin recovery and volume growth.

North America Salty Snacks is the growth engine. Sales increased 11.9% to $1.3 billion, while segment income jumped 21.3% to $242 million, with margins expanding 140 basis points to 19.0%. Volume grew 8% organically, and the LesserEvil acquisition added another 2% growth. Management is strategically reducing private label manufacturing to redirect capacity toward branded products, a move that improves margin mix. Hershey is building a second franchise with strong growth and improving profitability. If salty snacks maintain mid-single digit growth while margins approach confectionery levels, the segment could contribute 25% of operating profit by 2028.

The International segment faced challenges in 2025. Sales were $942 million, but segment income fell to $3.3 million as margins declined. International markets are often more cocoa-intensive and premium-positioned, making them more sensitive to price increases. Management is focused on gaining share in core markets like Brazil, India, and Mexico. International growth remains a long-term objective as the company works to replicate its U.S. brand strength and supply chain efficiency overseas.

Cash flow generation remains the financial bedrock. Operating cash flow was $2.3 billion in 2025, robust enough to fund $1.3 billion in acquisitions and $1.1 billion in dividends. The company has $1.88 billion available on its revolving credit facility and maintains a stable liquidity position. The balance sheet supports both the recovery and continued portfolio transformation.

Outlook, Management Guidance, and Execution Risk

Management's 2026 guidance frames the investment thesis. The company expects 4-5% net sales growth and 30-35% earnings growth, with earnings recovery driven by gross margin expansion of 500+ basis points. This is based on three concrete drivers. First, cocoa futures have declined from record highs, and Hershey's hedging program is well-positioned for 2026. Second, pricing actions taken in 2025 will contribute to 2026 sales growth, helping to offset remaining cocoa inflation. Third, the AAA Initiative will deliver its full $400 million in annual savings. This provides a quantifiable path to margin recovery.

The new CEO transition adds both opportunity and risk. Kirk Tanner, appointed in August 2025, brings three decades of PepsiCo (PEP) experience in snacks and beverages. His "next generation of growth" strategy emphasizes sustainable top-line growth, portfolio modernization, and connecting brands to cultural moments like the Olympics and NCAA Final Four. Tanner's snack expertise could accelerate the salty snacks platform, while his beverage background suggests experience with managing commodity volatility.

Tariffs remain a variable. Management estimates an impact of up to $100 million per quarter in late 2025, with a significant portion from cocoa and Canadian retaliatory tariffs. However, they have expressed optimism about potential relief, noting that cocoa could receive exemptions. Hershey is also pursuing mitigation through supply chain optimization. Tariffs represent a factor in the 2026 earnings model, but the company has pricing power and cost savings to work toward its targets.

Volume elasticity assumptions are conservative. Management is planning for 0.8 elasticity in 2026. However, recent trends have been more favorable, with everyday CMG growing despite price increases. Conservative assumptions create upside potential; if consumer resilience continues, Hershey could see better volume performance than modeled.

Risks and Asymmetries

Cocoa price volatility remains a primary risk. While futures have declined, they remain elevated compared to historical averages. Hershey's hedging program provides near-term protection but does not eliminate long-term exposure. Another cocoa spike would compress margins and could force additional pricing. Hershey's scale provides sourcing options, and the company is actively diversifying origins to increase supply security.

Tariff policy is unpredictable. While there is discussion of potential cocoa exemptions, trade policy can shift. A $100 million quarterly headwind would impact the benefits of the AAA Initiative savings. Hershey's ability to pass through costs and its engagement with policymakers are mitigating factors, but this remains a key factor for investors to monitor.

The International segment's performance represents a strategic choice. Management is focused on the long-term opportunity and is accepting lower near-term profits to maintain market share during the commodity cycle. If cocoa normalizes and Hershey can leverage its U.S. playbook internationally, the segment could become a more meaningful contributor to total company earnings.

SNAP program changes pose a manageable risk. With limited implementation of waivers so far and candy representing a small fraction of SNAP purchases, the impact is accounted for in guidance. Hershey does not over-index to SNAP and has salty snacks as a natural hedge.

GLP-1 drugs are being monitored but show no material impact so far. Confectionery's role as an affordable indulgence may insulate it better than other snack categories. Hershey's expansion into protein and functional snacking positions the company to participate in broader health trends.

Valuation Context

At $213.73 per share, Hershey trades at 49.25 times trailing earnings and 24.37 times EV/EBITDA, with a free cash flow yield of approximately 4.0%. These multiples reflect expectations for the 2026 earnings recovery. The company's enterprise value of $48.1 billion represents 4.12 times sales, a premium to consumer staples peers justified by brand moats and pricing power.

Relative to direct competitors, Hershey's valuation reflects its unique position. Mondelez (MDLZ) trades at 30.83 times earnings with 5.8% revenue growth, while Nestlé (NSRGY) trades at 21.49 times earnings with 3.5% organic growth. Hershey's P/E reflects the trough earnings base of 2025. On a forward basis, if the company delivers its projected EPS growth, the P/E would align more closely with peers while still reflecting brand loyalty and U.S. market position.

The balance sheet supports the valuation. Debt-to-equity of 1.24 is manageable for a company with 18.89% return on equity. The 2.72% dividend yield becomes more sustainable as earnings recover. With $470 million remaining on the share repurchase authorization, capital return could provide downside support.

Key valuation drivers for 2026 will be gross margin expansion and salty snack growth. If Hershey delivers its margin recovery targets, EBITDA could approach $2.5 billion. If salty snacks maintain double-digit growth and reach 15% of sales by 2027, the market may recognize the improved earnings quality.

Conclusion

Hershey's investment thesis hinges on the margin recovery in core confectionery and the sustained growth of salty snacks. The 2025 earnings decline was a commodity cycle trough that management is addressing through pricing, productivity, and portfolio transformation. With cocoa costs easing, the AAA Initiative delivering $400 million in savings, and new CEO Kirk Tanner's snack expertise, Hershey has a path to 30-35% earnings growth in 2026.

The critical variables for investors are execution and external policy. The company's balance sheet, cash flow, and category leadership provide a strong foundation, while the dual engine strategy offers upside if both segments perform. At current valuations, the market is anticipating a successful recovery. The next twelve months will determine whether this 130-year-old company can successfully navigate its next generation of growth.