Cocoa prices have more than tripled over the past year, a seismic shift in the commodity markets that has sent ripples through the confectionery industry, including a significant impact on The Hershey Company (HSY). This unprecedented surge in a key raw material has directly pressured the company's margins and contributed substantially to the roughly 40% decline in its stock price from its 2023 peak.
Navigating this volatile cost environment is paramount for Hershey, alongside addressing other potential headwinds such as proposed changes to the Supplemental Nutrition Assistance Program (SNAP) that could affect sales volume. Despite these challenges, the company is actively pursuing strategic initiatives, including product innovation and diversification into adjacent markets, aiming to mitigate the impact and position itself for future growth.
The Cocoa Conundrum and Margin Pressure#
The dramatic increase in cocoa prices represents the most immediate and significant challenge facing HSY. As a primary ingredient in its core confectionery products, the cost of cocoa has a direct and substantial impact on the company's cost of goods sold and, consequently, its gross margins. This is not merely a cyclical uptick but a fundamental shift driven by factors including unfavorable weather conditions in West Africa, where a majority of the world's cocoa is sourced, and structural supply chain issues.
Management has acknowledged the severity of this situation, and financial projections reflect the anticipated impact. According to analysis based on recent company commentary and reports from sources like Seeking Alpha and The Motley Fool in mid-April 2025, Hershey anticipates a sharp decline in adjusted earnings per share for 2025, potentially in the mid-30% range. This forecast is a direct consequence of the expected pressure on gross margins, which are projected to decline by a significant 650-700 basis points in 2025, as reported by Seeking Alpha.
Strategic Mitigation Efforts#
Hershey is implementing a multi-pronged strategy to combat the impact of soaring cocoa costs. These efforts include traditional cost mitigation tactics such as hedging, which helps lock in prices for a portion of its future raw material needs, although the effectiveness of hedging can be limited in prolonged periods of extreme price volatility. Diversifying sourcing is another avenue being explored, though shifting established supply chains for a commodity like cocoa is a complex, long-term endeavor.
Price increases on finished goods are also a critical component of the strategy to offset higher input costs. However, the ability to pass on costs to consumers is not unlimited and can impact sales volume, particularly in a price-sensitive market. The balance between maintaining profitability and preserving consumer demand is delicate. The success of these mitigation strategies will be closely watched by investors as the year progresses and will significantly influence whether the company can outperform its current depressed earnings expectations.
Navigating Shifting Consumer and Market Dynamics#
Beyond the direct impact of raw material costs, HSY is also navigating evolving consumer behaviors and potential regulatory changes. The broader food industry is seeing increased consumer demand for healthier snack options, a trend that Hershey has been addressing through strategic acquisitions and product development.
The SNAP Program Headwind#
A potential challenge on the horizon is the proposed changes to the Supplemental Nutrition Assistance Program (SNAP). While the details and final implementation remain uncertain, potential restrictions on the types of food items eligible for purchase with SNAP benefits could disproportionately affect sales of discretionary items like candy and soda. For a company like Hershey, with a significant presence in the North America Confectionery market, such changes could lead to reduced sales volume, particularly impacting retailers serving lower-income communities, as highlighted by reports from sources like The Counter and WYSO in April 2025.
Innovation and Diversification as Growth Levers#
In response to changing market dynamics and the need to diversify its revenue base, Hershey is actively investing in its Salty Snacks and International segments. The acquisition of LesserEvil, a player in the better-for-you snack category, is a clear example of this strategy, aligning with the growing consumer preference for healthier options (Food Dive, April 2025). Expanding the salty snacks portfolio reduces reliance on the core confectionery business, providing a buffer against volatility in cocoa prices and shifting consumer tastes in sweets.
Product innovation remains a key driver. The recent launch of Reese's Filled Pretzels in April 2025 (PR Newswire) demonstrates Hershey's ability to leverage its strong brand equity to create new, exciting products that capture consumer attention and potentially drive incremental sales. Furthermore, efforts to strengthen brand heritage, such as the announced major motion picture 'Hershey' set for a 2026 release (PR Newswire, April 2025), aim to enhance consumer connection and brand loyalty, which can be crucial in maintaining pricing power and market share in a competitive environment.
HSY's Valuation in Focus#
The significant decline in HSY's stock price over the past year has led to a notable contraction in its valuation multiples. As of mid-April 2025, the company's stock was trading around $166.59, with a market capitalization of approximately $33.75 billion, according to Monexa AI data. This price point places its valuation metrics significantly below historical averages, prompting debate among analysts about whether the stock is now undervalued or simply reflecting the challenging near-term outlook.
Current Metrics vs. History#
Comparing current valuation metrics to historical averages provides important context. Based on Monexa AI data, Hershey's current Price-to-Earnings (P/E) ratio stands at 15.24, based on its reported EPS of $10.93. This is substantially lower than its 5-year historical average P/E ratio, which has ranged between approximately 23.9x and 26.5x according to various financial data providers like Macrotrends and GuruFocus (data from April 2025). Similarly, the Price-to-Sales ratio is around 3.01 as of April 2025 (Monexa AI), compared to a 5-year average typically between 3.7x and 4.3x (FullRatio, Finbox).
Interpreting the Multiple Contraction#
This contraction in valuation multiples suggests that the market has already priced in significant headwinds, primarily the expected negative impact of high cocoa prices on 2025 earnings. The lower P/E ratio reflects the anticipation of a sharp decline in EPS, making the current price appear less expensive relative to trailing earnings but still requiring careful consideration against forward earnings estimates. The lower Price-to-Sales ratio indicates that investors are valuing each dollar of Hershey's revenue less highly than they have historically, likely due to concerns about profitability and margin compression.
Conversely, Hershey's current dividend yield, around 3.29% as of April 2025 (Monexa AI), is notably higher than its 5-year historical average, which has typically ranged between 1.89% and 2.25% (Macrotrends). This elevated yield is a direct result of the lower stock price combined with consistent dividend payments, potentially making the stock more attractive to income-focused investors seeking yield in a challenging market.
Here's a comparison of Hershey's current valuation metrics with historical averages based on available data up to mid-April 2025:
| Metric | Current Value | 5-Year Historical Average |
|---|---|---|
| P/E Ratio | 15.24 | ~23.9x - 26.5x |
| Price-to-Sales Ratio | 3.01 | ~3.7x - 4.3x |
| Dividend Yield | 3.29% | ~1.89% - 2.25% |
The data indicates a clear repricing of HSY shares relative to its historical trading patterns, reflecting the market's assessment of the current fundamental challenges.
Competitive Landscape and Industry Trends#
The Hershey Company operates in a highly competitive global market for confectionery and snacks. While it holds a leading position, particularly in the North American confectionery segment, it faces strong competition from global giants like Mondelez International (MDLZ) and Nestlé (NSRGY), as well as numerous smaller players and private label brands.
Market Positioning and Key Competitors#
Hershey's competitive strength lies in its iconic brands, strong distribution network, and established consumer loyalty. However, competitors are also actively innovating and expanding their portfolios, particularly in the growing salty snacks and healthier alternatives categories. The acquisition strategy pursued by Hershey, such as the LesserEvil deal, is a direct response to these competitive pressures and the need to maintain relevance with evolving consumer tastes.
Broader Industry Headwinds and Opportunities#
The entire food industry is grappling with rising raw material costs, not limited to cocoa, but also including sugar, dairy, and packaging materials. This creates a challenging operating environment for all players. Beyond costs, industry trends include increasing consumer focus on health and wellness, demand for transparency in sourcing, and the growing importance of e-commerce and direct-to-consumer channels (National Confectioners Association, April 2025).
Hershey's investments in its online presence and supply chain capabilities are crucial for adapting to the shift towards digital commerce. Furthermore, the industry is seeing a greater focus on sustainable sourcing and ethical business practices, areas where companies are increasingly expected to demonstrate leadership. While these initiatives require investment, they can also enhance brand reputation and appeal to a segment of consumers willing to pay a premium for ethically sourced products.
Management's Execution and Future Trajectory#
Assessing management's execution is critical, particularly during periods of significant market challenge. The response to the cocoa crisis, the proactive steps in portfolio diversification, and the commitment to innovation all speak to management's efforts to navigate the current environment and position the company for the future.
Assessing Recent Strategic Moves#
The strategic moves, such as the LesserEvil acquisition and the focus on expanding the Salty Snacks and International segments, appear aligned with broader industry trends and the need to reduce dependency on the volatile cocoa market. The success of these initiatives will depend on effective integration, successful product launches, and efficient market penetration. The balance between investing in these growth areas and managing the cost pressures in the core business is a key challenge for management.
Historical context suggests that successfully navigating commodity price spikes requires a combination of pricing power, cost management, and strategic portfolio adjustments. While historical precedents for a cocoa price surge of this magnitude are rare, past periods of inflation have tested food manufacturers' ability to protect margins. Management's track record in translating strategic initiatives into financial outcomes during previous cycles will be relevant for investors assessing their current execution capabilities.
Key Risks and Potential Catalysts#
The near-term outlook for HSY remains clouded by the uncertainty surrounding cocoa prices. Continued high prices or further increases would exacerbate margin pressure and could lead to downward revisions in earnings forecasts. The potential impact of SNAP program changes also represents a downside risk to domestic sales volume.
However, potential catalysts exist. A stabilization or decline in cocoa prices, perhaps due to improving weather conditions or increased supply in future harvests, would significantly alleviate cost pressure and could lead to margin recovery sooner than anticipated. Successful execution of growth strategies in Salty Snacks and International markets could provide upside surprise to revenue and earnings. Furthermore, the current depressed valuation, relative to historical levels, could represent a buying opportunity if the market's concerns about future earnings prove to be overly pessimistic or if the company demonstrates resilience in its operational execution.
Conclusion: Key Takeaways for Investors#
The Hershey Company is currently facing a confluence of significant challenges, dominated by the unprecedented surge in cocoa prices and the potential impact of changes to the SNAP program. These factors have directly pressured the company's profitability expectations for 2025 and have contributed to a substantial decline in its stock valuation, bringing multiples well below historical averages.
Management is actively responding through a strategy focused on cost mitigation, including hedging and potential price increases, alongside efforts to diversify the business through expansion in Salty Snacks and International markets and continuous product innovation. The success of these strategic responses in mitigating the near-term headwinds and driving long-term growth will be critical for the company's future performance.
For investors, the current situation presents a complex picture. While the near-term earnings outlook is weak, the significant contraction in valuation multiples suggests that the market has already priced in substantial challenges. The elevated dividend yield may appeal to income investors. The trajectory of cocoa prices and the effectiveness of Hershey's strategic initiatives in offsetting costs and driving growth will be the key factors determining the company's performance and the potential for valuation recovery in the coming periods.