8-K: Hershey Reports Strong Q2 Sales Growth Amidst Significant Profit Decline and Lowered Full-Year Outlook

The Hershey Company announced a 26% increase in second-quarter net sales, driven by timing factors, but reported net income plummeted 65.2% and adjusted earnings per share declined 4.7%, leading to a lowered full-year earnings outlook due to higher costs and tariffs.

Summary

• Consolidated net sales for the second quarter ended June 29, 2025, increased 26.0% to $2,614.7 million.
• Organic, constant currency net sales increased 26.3%, reflecting the lap of planned inventory reductions from the Q2 2024 ERP system implementation, a later Easter in 2025, and earlier Halloween seasonal orders.
• Reported net income decreased 65.2% to $62.7 million, or $0.31 per share-diluted.
• Adjusted earnings per share-diluted decreased 4.7% to $1.21.
• Reported gross margin was 30.5%, a decrease of 970 basis points from 40.2% in Q2 2024, primarily due to derivative mark-to-market losses, higher commodity and manufacturing costs, and unfavorable mix.
• Adjusted gross margin was 38.1%, a decrease of 510 basis points from 43.2% in Q2 2024.
• The company updated its 2025 full-year outlook, now expecting reported earnings per share growth to be down approximately 50% (from high-40% range) and adjusted earnings per share growth to be down 36% to 38% (from mid-30% range).
• Full-year tariff expense is estimated to be approximately $170 million to $180 million.
• Advancing Agility & Automation Initiative savings are now expected to be approximately $150 million, up from $125 million previously.

Sentiment

Score: 4

Explanation: While sales growth was strong, driven by timing factors, the significant decline in reported net income and adjusted EPS, coupled with a lowered full-year earnings outlook due to persistent cost pressures (cocoa, tariffs) and derivative losses, indicates a challenging profitability environment. The increase in debt also adds a layer of concern, leading to a mixed to slightly negative sentiment.

Positives

• Consolidated net sales increased significantly by 26.0% to $2,614.7 million in the second quarter of 2025.
• Organic, constant currency net sales grew 26.3%, slightly exceeding expectations.
• North America Confectionery segment net sales increased 32.0%, with volume growth of approximately 25 points and price realization of 6 points.
• North America Salty Snacks segment net sales increased 8.8%, with volume growth of approximately 4 points and price realization of 5 points.
• Hershey's U.S. candy, mint, and gum (CMG) retail takeaway in MULO+ w/ Convenience channels grew 21.8% for the 12-week period ended June 29, 2025, with CMG share increasing 90 basis points.
• SkinnyPop ready-to-eat popcorn takeaway increased 4.0%, and its share increased 49 basis points.
• Dots Homestyle Pretzels retail sales increased 13.0%, resulting in a 208-basis point pretzel category share gain.
• North America Salty Snacks segment income increased 27.4%, with segment margin improving by 310 basis points to 21.1%.
• The company increased its expected savings from the Advancing Agility & Automation Initiative to approximately $150 million for the full year, up from $125 million.
• Adjusted operating profit increased 7.1% versus the second quarter of 2024, driven by higher sales.

Negatives

• Reported net income decreased 65.2% to $62.7 million in the second quarter of 2025.
• Reported earnings per share-diluted decreased 65.2% to $0.31.
• Adjusted earnings per share-diluted decreased 4.7% to $1.21.
• Reported gross margin declined by 970 basis points to 30.5%, primarily due to derivative mark-to-market losses, higher commodity and manufacturing costs, and unfavorable mix.
• Adjusted gross margin declined by 510 basis points to 38.1% due to higher commodity and manufacturing costs.
• Reported operating profit decreased 33.0% to $192.8 million, with reported operating profit margin decreasing 650 basis points to 7.4%.
• Adjusted operating profit margin declined 280 basis points to 15.7%.
• The reported effective tax rate increased significantly to 57.9% (up 3,150 basis points), driven by foreign rate differentials and incremental non-U.S. tax reserves.
• The adjusted effective tax rate increased to 32.8% (up 840 basis points).
• International segment profit decreased 20.8% to $19.8 million, driven by commodity and manufacturing cost inflation, foreign exchange headwinds, and higher advertising and consumer marketing expenses.
• International segment volume, excluding the ERP system implementation lap, declined more than expected due to incremental category and regulatory headwinds in Mexico.
• International segment price realization was below expectations due to higher trade promotions and unfavorable mix.
• Full-year reported EPS growth outlook was lowered to down approximately 50% from a prior high-40% range.
• Full-year adjusted EPS growth outlook was lowered to down 36% to 38% from a prior mid-30% range.
• The company expects approximately $170 million to $180 million in tariff expense for the full year.
• Other expense, primarily reflecting the write-down of equity investments, is expected to be approximately $75 million to $80 million for the full year.

Risks

• Disruptions or inefficiencies in the supply chain due to loss or disruption of essential manufacturing or supply elements or other factors.
• Issues, concerns, or regulatory changes related to the quality and safety of products, ingredients, or packaging, human and workplace rights, and other environmental, social, or governance matters.
• Changes in raw material and other costs, along with the availability of adequate supplies of raw materials and the ability to successfully hedge against volatility in raw material pricing.
• Ability to successfully execute business continuity plans to address changes in consumer preferences and the broader economic and operating environment.
• Selling price increases, including volume declines associated with pricing elasticity.
• Market demand for new and existing products.
• Increased marketplace competition.
• Failure to successfully execute and integrate acquisitions, divestitures, and joint ventures.
• Changes in governmental laws, regulations, and policies, including taxes and tariffs.
• Political, economic, and/or financial market conditions, including with respect to inflation, rising interest rates, slower growth or recession, changes in the U.S. administration, and other events beyond control such as the impacts on the business arising from the conflict between Russia and Ukraine.
• Risks and uncertainties related to international operations.
• Disruptions, failures, or security breaches of information technology infrastructure and that of customers and partners (including suppliers).
• Ability to hire, engage, and retain a talented global workforce.
• Ability to realize expected cost savings and operating efficiencies associated with strategic initiatives or restructuring programs.
• Complications with the design, implementation, or usage of the new enterprise resource planning system, including the ability to support post-implementation efforts and maintain enhancements, new features, or modifications.

Future Outlook

The company updated its 2025 full-year financial outlook, maintaining net sales growth at 'up at least 2%' but lowering reported earnings per share growth to 'down ~50%' and adjusted earnings per share growth to 'down 36% to 38%'. This revised outlook incorporates estimated full-year tariff expenses of $170 million to $180 million and recently announced commodity cost mitigation strategies. The guidance does not include the effects of the proposed acquisition of LesserEvil. The company also expects approximately $75 million to $80 million in other expense, $200 million in interest expense, and $425 million to $450 million in capital expenditures, while increasing Advancing Agility & Automation Initiative savings to $150 million.

Management Comments

• "We are pleased with our second-quarter results and the momentum we are seeing in our business."
• "Investments in our brands and impactful innovation, coupled with effective execution, are driving solid sales and share gains across both our U.S. confection and salty snacking business."
• "Looking ahead, we remain committed to delivering balanced growth and have taken pivotal steps toward mitigating cocoa inflation through strategic pricing, enhanced productivity, and technology enabled efficiency and speed."

Industry Context

Hershey's strong top-line growth, particularly in North America Confectionery and Salty Snacks, indicates robust consumer demand for snacking and confectionery products, aligning with broader industry trends of increased at-home consumption and comfort food demand. However, the significant decline in profitability and lowered earnings outlook, driven by higher commodity costs (like cocoa inflation), manufacturing expenses, and tariffs, reflects the pervasive inflationary pressures impacting the entire consumer packaged goods sector. The company's strategic pricing and productivity initiatives are common responses across the industry to mitigate these cost headwinds, while continued investment in advertising and innovation is crucial for maintaining market share in a competitive landscape.

Comparison to Industry Standards

• The significant increase in net sales (26.0%) is notably strong, especially when compared to typical single-digit growth rates seen in mature CPG companies like Mondelez International or Nestlé, although Hershey's growth is heavily influenced by timing factors such as the lap of prior year inventory reductions and Easter timing.
• The decline in reported gross margin by 970 basis points to 30.5% is a substantial contraction, indicating more severe cost pressures than some peers might be experiencing, or a higher exposure to volatile commodities like cocoa. For example, while many food companies face inflation, a nearly 10-point drop in gross margin is a significant outlier.
• The adjusted gross margin of 38.1% is still a healthy margin for the CPG sector, but the 510 basis point decline suggests that even after accounting for non-recurring items, core profitability is under pressure from commodity and manufacturing costs.
• The lowered full-year adjusted EPS growth outlook of down 36% to 38% is a significant downward revision and indicates a more challenging profit environment than many large-cap food companies, which often aim for stable or modest EPS growth even in inflationary periods. This suggests Hershey is facing unique or more acute cost challenges, particularly with cocoa and tariffs, compared to diversified food companies like PepsiCo or Coca-Cola, which might have broader portfolios to offset specific commodity spikes.

Stakeholder Impact

• Shareholders: Will experience a significant decline in reported earnings and a lowered full-year earnings outlook, potentially impacting share price and future dividends.
• Customers: May face continued strategic pricing increases as the company mitigates commodity inflation.
• Employees: The Advancing Agility & Automation Initiative aims to generate long-term savings, which could imply ongoing business realignment activities and potential impacts on workforce structure, though it also includes higher incentive compensation.
• Suppliers: The company's focus on mitigating commodity inflation and supply chain productivity may influence negotiations and relationships with raw material suppliers.
• Creditors: Higher leverage and interest rates on note issuance indicate increased debt, which could affect the company's credit profile and cost of borrowing.

Next Steps

• The company will post a pre-recorded management discussion of its second-quarter 2025 results and business update to its website at www.thehersheycompany.com/investors at approximately 6:45 a.m. (Eastern time) on July 30, 2025.
• The company will host a live question and answer session with investors and financial analysts at 8:15 a.m. (Eastern time) on July 30, 2025.

Key Dates

Recommendation

While Hershey demonstrated strong top-line sales growth, much of it was attributed to timing factors (ERP lap, Easter, Halloween orders). The significant decline in reported net income and adjusted EPS, coupled with a lowered full-year earnings outlook, signals substantial profitability challenges driven by high commodity costs (especially cocoa), tariffs, and derivative losses. The company is taking steps to mitigate these issues through pricing and productivity, but the immediate impact on earnings is negative. The increase in long-term debt also warrants caution. Given the mixed performance with strong sales but weak profitability and a reduced outlook, a 'hold' recommendation is appropriate as investors should monitor the effectiveness of cost mitigation strategies and the trajectory of commodity prices before making further investment decisions.

Keywords

Hershey, HSY, Confectionery, Salty Snacks, Earnings, Financial Results, Q2 2025, Net Sales, EPS, Gross Margin, Operating Profit, Outlook, Cocoa Inflation, Tariffs, Supply Chain, Consumer Packaged Goods, Snacks, Candy, ERP System, Acquisition, Sour Strips, SkinnyPop, Dots Pretzels