Hershey Company (HSY, Financial) has revised its full-year sales and earnings growth projections downward, citing "historically high cocoa prices and a challenging consumer environment." The company's adjusted earnings per share for the third quarter fell to $2.34, missing analysts' expectations of $2.56, and down from $2.60 in the same period last year. Net sales for the third quarter were $2.99 billion, a 1.3% year-over-year decline, and below the anticipated $3.07 billion. On a constant currency basis, organic sales decreased by 1%.
Hershey now forecasts flat full-year net sales growth, a downgrade from the 2% growth anticipated in August. As one of the world's largest chocolate manufacturers, Hershey has been hard hit by record-high cocoa prices. Although cocoa prices have eased from their peaks, they remain significantly elevated compared to previous years. Additionally, sugar prices remain high, further pressuring costs. Rising input costs have forced Hershey to increase prices and diversify its product range beyond chocolate, such as collaborating with Shaquille O’Neal on new gummies.
The company aims to save $300 million by 2026 through cost-cutting and price hikes to mitigate the impact of rising cocoa prices and enhance profit margins. However, these price increases have led to consumer pushback. In the third quarter, organic prices rose by 2%, while organic sales volume fell by 3% as consumers opted for cheaper private-label alternatives.
Hershey's North American confectionery segment saw a 0.8% increase in net sales to $2.4 billion, but sales of salty snacks dropped by 15.5%. Internationally, sales decreased by 4% with a 1% decline in sales volume, due to fierce competition in Brazil and ongoing market weakness in Mexico.
The shift towards gummies, licorice, and flavored chocolates comes amidst shrinking profit margins and slowing sales growth for chocolate manufacturers. The dual pressures of consumer demand for costly chocolates and the company's mounting costs, exacerbated by supply chain disruptions during the pandemic and now a cocoa bean shortage, have weighed heavily on Hershey's margins. The company's adjusted gross margin declined by 460 basis points to 40.3%, and its operating profit margin fell by 300 basis points.
Hershey's CEO Michele Buck emphasized that while the year-to-date performance has been affected by record-high cocoa prices and a tough consumer market, the company remains focused on managing these challenges. Looking ahead, Hershey has downgraded its fiscal 2024 net sales growth expectation to flat, as opposed to the previously estimated 2% growth. The earnings outlook for fiscal 2024 is now expected to be slightly lower, with EPS between $9.00 and $9.10, down from the prior guidance range of $9.49 to $9.59, and below the consensus estimate of $9.40, as well as the $9.59 recorded in 2023.
