Hershey (HSY): Navigating Record Cocoa Costs & Margin Pressure

The Hershey Company (HSY is grappling with an unprecedented surge in cocoa prices, a commodity cost inflation that threatens to erode its historically strong profit margins. While the confectionery giant reported a robust operating margin of 25.87% in fiscal year 2024, the benefits of past hedging strategies are quickly diminishing, leading to projected significant contractions in profitability for 2025. This dynamic forces the company to walk a tightrope between maintaining pricing power and preserving consumer demand, all while its capital allocation strategies, particularly dividend sustainability, come under heightened scrutiny.

This challenging environment demands a comprehensive look at HSY's strategic responses and their potential impact on its financial trajectory, especially as the industry adjusts to a new, higher-cost reality. The company's ability to innovate, manage its supply chain, and adapt its market approach will be critical in navigating these volatile waters and sustaining long-term shareholder value.

The Unprecedented Surge in Cocoa Prices and Global Market Dynamics#

Since late 2023, cocoa prices have experienced an unprecedented spike, driven by a confluence of supply chain disruptions, climate change impacts on major cocoa-producing regions, and increased global demand. These factors have created a commodity volatility environment that significantly impacts input costs for confectionery companies like The Hershey Company. The primary drivers include persistent droughts and irregular weather patterns in West Africa, which accounts for over 70% of global cocoa production. These climate challenges reduce harvest yields, tightening supply and elevating prices. Additionally, geopolitical tensions and logistical disruptions further hinder supply chains, exacerbating commodity volatility. Query 1

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The global market's response has been a sharp increase in cocoa futures contracts, with prices reaching levels not seen in over a decade. This surge directly affects input costs for manufacturers, pressuring profit margins across the industry. As a result, Hershey and its peers face the challenge of managing higher raw material costs amidst a fluctuating market environment. The ripple effect extends beyond cocoa, as other inputs like sugar and packaging materials also face inflationary pressures, compounding the challenge for consumer packaged goods companies. [Query 2](https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQHix7qzKRSDbfiXZKxlr4OsnU0ZWBiqdn6O3S3va5XRG41FVuF-HdLeZ5k5o_LFRQ_EarReNIfqMi-lXWNPA_cGqH9L7OPzAF5tp4m8hljXbkXLk2qmeCuHM-SMe5r60Jtms_Hny5pi8LkHJbLxH_eJORNRNq1zNXfNQNiVHEWnIXBhvguprYrNsvh-bdXcPRKTFLm0XyohCtQrDTF5sEcmx4RhE7sArHKo19AOVy9iqh7SglTNc4xj-_8omf3RB53rEZP41VYoRgU=.

Navigating Margin Erosion: Hershey's Financial Resilience Under Pressure#

Hershey's financial performance has come under significant pressure due to the surging input costs, primarily from record-high cocoa prices. While the company reported a robust operating margin of 25.87% in fiscal year 2024, representing an increase from 22.94% in 2023, this strength is poised to be challenged. The gross profit ratio also improved to 47.32% in 2024 from 44.77% in 2023, demonstrating operational efficiency in the face of initial cost pressures. However, the elevated cocoa prices have led to a projected contraction in gross and operating profit margins for 2025. Specifically, Hershey anticipates an adjusted gross profit margin decline of approximately 650 to 700 basis points in 2025. This contraction is attributed to the diminishing benefits of hedging strategies that initially cushioned the impact of high cocoa costs. As these hedges roll off, the actual costs are reflected more directly in the financial statements. [Query 1)(https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQECDYN02EiAYb-sPwKNY2KgKR_llQd7j85M2TPhP6AHZa3-uqc6v_UpCgzDIfWcFUexfoJ2XtJvweJm3OCLd3QfILMGBsh9sbEbDSQue5l1MQDaAIjV2ugn5SEbtzg7c40ZacctjZVXLy6m9WhfI0qzdV9MjZKAi7YprZ_VY5Ue0iCFIsAb8C5XbKu2YMlzykuDY41XMJqW)

Metric (as % of Revenue)	2021	2022	2023	2024
Gross Margin	45.13%	43.18%	44.77%	47.32%
Operating Margin	17.98%	16.10%	22.94%	25.87%
Net Margin	16.47%	15.79%	16.68%	19.83%
EBITDA Margin	24.51%	22.84%	24.66%	27.70%

Strategic Countermeasures: Pricing, Demand, and Efficiency#

Hershey has adopted a comprehensive set of mitigation strategies to manage the impact of record-high cocoa costs. These include strategic pricing adjustments, consumer demand management, and hedging to mitigate commodity volatility. The company has increased product prices in select markets to pass some of the input cost increases onto consumers. While this has helped bolster revenue, which saw a modest increase of +0.33% in 2024 to $11.2 billion and a 7.68% 3-year revenue CAGR, the effectiveness of these measures is nuanced. Consumer demand remains sensitive to higher prices, especially amid broader economic uncertainties, requiring a delicate balance to avoid significant volume declines. Query 2

Strategic Pricing and Consumer Demand Management#

By strategically raising prices on certain products, the company aims to pass a portion of the input cost inflation onto consumers. However, given the diminishing hedge benefits and ongoing high input costs, price increases alone are unlikely to fully offset margin pressures. To mitigate potential volume declines, Hershey is actively engaging in demand shaping by promoting high-margin products and optimizing product portfolios to focus on items less sensitive to price increases. This also includes exploring product line extensions and limited-edition offerings to attract price-sensitive consumers while preserving brand loyalty. This approach is critical as the company seeks to sustain revenue growth without significantly compromising volume in a challenging inflationary environment. [Query 4](https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQHix7qzKRSDbfiXZKxlr4OsnU0ZWBiqdn6O3S3va5XRG41FVuF-HdLeZ5k5o_LFRQ_EarReNIfqMi-lXWNPA_cGqH9L7OPzAF5tp4m8hljXbkXLk2qmeCuHM-SMe5r60Jtms_Hny5pi8LkHJbLxH_eJORNRNq1zNXfNQNiVHEWnIXBhvguprYrNsvh-bdXcPRKTFLm0XyohCtQrDTF5sEcmx4RhE7sArHKo19AOVy9iqh7SglTNc4xj-_8omf3RB53rEZP41VYoRgU=.

Hedging Strategies and Future Volatility#

Hershey employs sophisticated hedging strategies to mitigate the risks associated with future cocoa price volatility, including forward contracts and options that lock in prices for a specified period, providing cost predictability. These activities are designed to cover a significant portion of anticipated cocoa purchases. While these strategies offered some cushion in 2024, as hedges roll off, the company faces increased exposure to market fluctuations. This requires careful management to balance cost savings against potential missed opportunities if prices decline, and the diminishing benefits of prior hedges mean Hershey must continuously adapt its risk management approach. [Query 1)(https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQECDYN02EiAYb-sPwKNY2KgKR_llQd7j85M2TPhP6AHZa3-uqc6v_UpCgzDIfWcFUexfoJ2XtJvweJm3OCLd3QfILMGBsh9sbEbDSQue5l1MQDaAIjV2ugn5SEbtzg7c40ZacctjZVXLy6m9WhfI0qzdV9MjZKAi7YprZ_VY5Ue0iCFIsAb8C5XbKu2YMlzykuDY41XMJqW)

Internal Initiatives and Operational Efficiency#

Beyond external strategies, Hershey is actively pursuing productivity improvements and cost-saving initiatives across its manufacturing and supply chain operations. These include investing in automation, optimizing logistics, and streamlining production processes. The company is also exploring digital transformation tools to enhance operational efficiency and reduce waste. These initiatives aim to offset inflationary pressures from high input costs, including cocoa, sugar, and packaging materials. It's worth noting that reported research and development expenses were $0 in 2024, a significant decrease from $50.03 million in 2023, suggesting a potential shift in how R&D costs are categorized or a heightened focus on immediate cost control rather than long-term product innovation investment in this specific reporting line. Despite the challenges posed by commodity price volatility, Hershey's focus on internal efficiency is vital to maintaining profitability and dividend sustainability in a high-cost environment. [Query 3](https://vertexaisearch.cloud.google.com/grounding-api-redirect/AUZIYQECDYN02EiAYb-sPwKNY2KgKR_llQd7j85M2TPhP6AHZa3-uqc6v_UpCgzDIfWcFUexfoJ2XtJvweJm3OCLd3QfILMGBsh9sbEbDSQue5l1MQDaAIjV2ugn5SEbtzg7c40ZacctjZVXLy6m9WhfG6Z6B_eF5r_s2t_r6qj9L7OPzAF5tp4m8hljXbkXLk2qmeCuHM-SMe5r60Jtms_Hny5pi8LkHJbLxH_eJORNRNq1zNXfNQNiVHEWnIXBhvguprYrNsvh-bdXcPRKTFLm0XyohCtQrDTF5sEcmx4RhE7sArHKo19AOVy9iqh7SglTNc4xj-_8omf3RB53rEZP41VYoRgU=.

Capital Allocation and Dividend Sustainability#

[HSY)(/dashboard/companies/HSY) has long been regarded as a reliable dividend payer, a testament to its consistent cash flow generation. The company's last declared annual dividend was $5.48 per share, translating to a dividend yield of 3.28%. While the current TTM payout ratio stands at 65.72%, indicating a substantial portion of earnings is distributed, the sustainability of this dividend is a key concern for investors given the projected margin pressures. In 2024, the company paid out $1.08 billion in dividends, an increase from $889.07 million in 2023.

Crucially, Hershey's ability to generate strong free cash flow (FCF) provides a buffer. FCF surged to $1.93 billion in 2024, marking a +24.07% increase from $1.55 billion in 2023, and operating cash flow grew +8.97% to $2.53 billion. This robust cash generation is vital for covering dividend payments and funding other capital allocation priorities, such as share repurchases, which amounted to $494.19 million in 2024. The company's net debt to EBITDA ratio of 1.91x and current ratio of 1.59x suggest a healthy financial position, providing some flexibility to manage increased input costs without immediately jeopardizing shareholder returns. However, the anticipated increase in pro forma leverage to 2.6x by the end of fiscal 2025 warrants close monitoring, as it could constrain future financial maneuvers.

Hershey's Cash Flow and Shareholder Returns (FY 2021-2024)#

Metric (in Millions USD)	2021	2022	2023	2024
Net Cash from Operations	$2,080	$2,330	$2,320	$2,530
Free Cash Flow	$1,590	$1,810	$1,550	$1,930
Dividends Paid	-$685.99	-$775.03	-$889.07	-$1,080
Common Stock Repurchased	-$457.95	-$388.96	-$264.91	-$494.19

Source: Monexa AI Financial Data

Analyst Expectations and Future Trajectory#

Analyst estimates for HSY reflect a cautious but generally positive outlook for future growth despite the current headwinds. The consensus expects revenue to grow at a compound annual growth rate (CAGR) of +3.32% and earnings per share (EPS) to grow at +10.57% over the coming years. For fiscal year 2025, estimated revenue is approximately $11.44 billion with an estimated EPS of $6.01. These figures suggest that while the immediate impact of cocoa prices will be felt on margins, analysts foresee Hershey's ability to navigate these challenges and resume a growth trajectory.

Forward valuation multiples, such as the forward P/E ratio, are projected to be 21.86x for 2025, gradually decreasing to 14.62x by 2029. Similarly, the forward EV/EBITDA is estimated at 13.72x for 2025, declining to 12.04x by 2029. These projections indicate a market expectation of continued earnings growth and operational efficiency improvements that could justify current valuation levels and potentially drive future appreciation. Investors will be keenly awaiting the upcoming earnings announcement on July 30, 2025, for further clarity on these projections and the company's updated outlook.

Recent earnings surprises have been mixed, with a beat in Q1 2025 (actual EPS $2.09 vs. estimated $1.94) and Q4 2024 (actual EPS $2.69 vs. estimated $2.40), but misses in Q3 2024 (actual EPS $2.34 vs. estimated $2.56) and Q2 2024 (actual EPS $1.27 vs. estimated $1.44). This mixed track record underscores the volatility and challenges in forecasting performance in the current environment.

What This Means For Investors#

For investors in HSY, the current landscape presents a nuanced picture. The immediate challenge from surging cocoa prices is undeniable, and the projected margin contraction for 2025 is a significant headwind. However, Hershey's historical financial resilience, evidenced by its strong operating margins in 2024 and robust free cash flow generation, provides a foundation for navigating these pressures. The company's proactive strategies, including pricing adjustments, demand shaping, and hedging, demonstrate a clear intent to mitigate the impact.

The dividend, with its attractive yield and seemingly manageable payout ratio, remains a key component of the investment thesis. Its sustainability hinges on the effectiveness of HSY's mitigation efforts and its ability to maintain healthy cash flows amidst higher input costs. Investors should closely monitor the upcoming earnings reports for updates on margin trends, cash flow generation, and management's commentary on the long-term outlook for commodity prices. The balance between protecting profitability and sustaining consumer demand will be crucial for HSY's performance in the coming quarters.

Key Takeaways#

Cocoa Price Impact: Record cocoa prices are expected to cause a significant 650-700 basis point decline in Hershey's adjusted gross profit margin and over 700 basis points in adjusted EBITDA margin for 2025.
Strategic Mitigation: Hershey is implementing price increases, demand shaping, commodity hedging, and internal productivity improvements to offset cost pressures.
Financial Resilience: Despite cost headwinds, HSY demonstrated strong operating margins of 25.87% in FY2024 and robust free cash flow of $1.93 billion, providing a buffer.
Dividend Sustainability: The dividend, with a 3.28% yield and 65.72% payout ratio, appears sustainable given current cash flow, but future margin pressure warrants close monitoring.
Analyst Outlook: Analysts project moderate revenue growth (+3.32% CAGR) and stronger EPS growth (+10.57% CAGR) for the coming years, suggesting optimism about HSY's ability to overcome current challenges.