10-Q: Hershey's Q2 Profit Plunges Amid Soaring Cocoa Costs

Hershey reports a significant drop in second-quarter and first-half net income and EPS, primarily due to elevated commodity costs and unfavorable derivative impacts, despite sales growth.

Summary

• Net sales for the second quarter of 2025 increased by 26.0% to $2,614.7 million, driven by a 21% volume increase and 5% favorable price realization.
• Net sales for the first six months of 2025 increased by 1.7% to $5,420.1 million, primarily due to 3% favorable price realization.
• Gross profit for Q2 2025 decreased by 4.5% to $796.3 million, with gross margin falling to 30.5% from 40.2% in Q2 2024.
• Gross profit for the first six months of 2025 decreased by 30.7% to $1,740.5 million, with gross margin declining to 32.1% from 47.1% in the prior year period.
• Operating profit for Q2 2025 decreased by 33.0% to $192.8 million, and for the first six months, it decreased by 58.2% to $562.0 million.
• Net income for Q2 2025 was $62.7 million, a 65.3% decrease from $180.9 million in Q2 2024.
• Net income for the first six months of 2025 was $286.9 million, a 70.7% decrease from $978.3 million in the prior year period.
• Diluted earnings per share (EPS) for Q2 2025 was $0.31, down 65.2% from $0.89 in Q2 2024.
• Diluted EPS for the first six months of 2025 was $1.41, down 70.6% from $4.80 in the prior year period.
• The effective income tax rate significantly increased to 57.9% for Q2 2025 and 39.3% for the first six months of 2025.
• North America Confectionery segment net sales increased by 32.0% in Q2 2025, driven by volume recovery post-ERP implementation and seasonal orders.
• North America Salty Snacks segment net sales increased by 8.8% in Q2 2025, primarily due to favorable price realization and volume growth in brands like Dots Homestyle Pretzels.
• International segment net sales increased by 4.4% in Q2 2025, but segment income decreased by 20.8% due to unfavorable foreign currency exchange rates and increased costs.

Sentiment

Score: 3

Explanation: The financial results show a severe decline in profitability (net income down 65-70%, EPS down 65-70%) driven by significant gross margin compression due to high commodity costs and unfavorable derivative impacts. While sales growth is present, the erosion of profit is a major concern, leading to a low sentiment score despite strategic initiatives and acquisitions.

Positives

• Net sales increased by 26.0% in Q2 2025 and 1.7% for the first six months of 2025, demonstrating continued top-line growth.
• Volume increased by approximately 21% in Q2 2025, driven by everyday core U.S. confection, timing of Easter, and higher Halloween seasonal orders, benefiting from planned inventory decreases in 2024 after ERP system implementation.
• Favorable price realization contributed approximately 5% to net sales growth in Q2 2025 and 3% for the first six months.
• U.S. retail takeaway increased by 18.5% in Q2 2025 across expanded multi-outlet combined plus convenience store channels.
• U.S. candy, mint, and gum (CMG) consumer takeaway increased by 21.8% in Q2 2025, with a market share increase of 90 basis points.
• U.S. Salty consumer takeaway increased by 6.1% in Q2 2025, with a market share increase of 26 basis points.
• The acquisition of Sour Strips was completed in November 2024, expanding the sour candy portfolio.
• A Merger Agreement to acquire LesserEvil, LLC, an organic popcorn and puffed snack producer, was entered into on March 31, 2025, complementing the existing product portfolio.
• The Advancing Agility & Automation Initiative (AAA Initiative) is expected to generate annual savings of approximately $350 million to $400 million at its conclusion in 2026.
• The company believes it has sufficient liquidity to satisfy anticipated funding needs in the foreseeable future, with $912.345 million in cash and cash equivalents as of June 29, 2025.

Negatives

• Gross profit decreased by 4.5% in Q2 2025 and 30.7% for the first six months of 2025.
• Gross margin significantly declined by 970 basis points in Q2 2025 (to 30.5%) and 1,500 basis points for the first six months (to 32.1%), primarily due to unfavorable commodity costs, especially cocoa, and unfavorable mark-to-market activity on commodity derivative instruments.
• Operating profit decreased by 33.0% in Q2 2025 and 58.2% for the first six months of 2025.
• Net income decreased by 65.3% in Q2 2025 and 70.7% for the first six months of 2025.
• Diluted EPS decreased by 65.2% in Q2 2025 and 70.6% for the first six months of 2025.
• The effective income tax rate increased substantially to 57.9% in Q2 2025 and 39.3% for the first six months of 2025, impacted by tax reserves, foreign rate differential, and state taxes.
• Interest expense, net, increased by 11.3% in Q2 2025 and 11.7% for the first six months, driven by higher long-term debt balances.
• Unallocated mark-to-market losses on commodity derivatives were $200.7 million in Q2 2025 and $412.2 million for the first six months of 2025, significantly impacting profitability.
• International segment income decreased by 20.8% in Q2 2025 and 28.4% for the first six months, primarily due to unfavorable foreign currency exchange rates and increased commodity and supply chain costs.

Risks

• Reputation or brand image could be impacted by issues related to product quality, safety, ingredients, packaging, human and workplace rights, and other environmental, social, or governance matters, potentially leading to litigation or negative operating results.
• Disruption to manufacturing operations or the supply chain could impair the ability to produce or deliver finished products, negatively impacting operating results.
• Inability to hire, engage, and retain talented global human capital could hinder growth strategies.
• Risks associated with climate change and other environmental impacts, as well as evolving stakeholder views on climate change, could negatively affect business and operations.
• Increases in raw material and energy costs, along with the availability of adequate supplies of raw materials (specifically cocoa, which has experienced elevated market prices), could continue to affect future financial results.
• Price increases may not be sufficient to offset cost increases and maintain profitability, or they may lead to sales volume declines due to pricing elasticity.
• Market demand for new and existing products could decline.
• Increased marketplace competition could negatively impact the business.
• Financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures, and joint ventures.
• International operations may not achieve projected growth objectives, adversely impacting overall business and results.
• Failure to fully realize expected cost savings and/or operating efficiencies from strategic initiatives or restructuring programs (like the AAA Initiative) may adversely impact the business.
• Changes in governmental laws, regulations, and policies, including taxes and tariffs, could increase costs and liabilities or impact demand for products.
• Political, economic, and/or financial market conditions, including impacts from the ongoing conflict between Russia and Ukraine, could negatively impact financial results.
• Disruptions, failures, or security breaches of information technology infrastructure could negatively impact operations.
• The scope and length of tariffs, including their effects on the broader economy and the business, remain uncertain, potentially leading to material adverse effects on results of operations, commodity prices, or supply availability.
• The possibility of a recession and changes in consumer shopping and consumption behavior could lead to increasing supply chain costs, higher inflation, and other business impacts.

Future Outlook

The company expects 2025 capital expenditures, including capitalized software, to approximate $425 million to $450 million, as capital spending as a percentage of sales is expected to return to historical levels. The Advancing Agility & Automation Initiative is projected to yield annual savings of $350 million to $400 million upon its conclusion in 2026. The acquisition of LesserEvil, LLC is expected to close by the end of 2025. The company is assessing the potential implications of the newly signed One Big Beautiful Bill Act on its operations and financial statements. The company also plans to remove all certified Food, Drug & Cosmetic colors from its snacks by the end of 2027.

Management Comments

• We saw positive consumer behavior shifts towards our products, as well as increased net sales; however, we continued to experience a dynamic macroeconomic environment, including continued price volatility related to select commodities, resulting in corresponding incremental costs and gross margin pressures, and net income declines.
• Despite specific actions taken to mitigate these gross margin pressures, higher prices for direct materials used to manufacture our products were, and continue to be, the primary incremental cost to our business.
• We believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements in both the short-term and in the long-term; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can operate effectively during the current economic environment.
• We will continue to evaluate the nature and extent of these evolving impacts on our business, consolidated results of operations, segment results, liquidity and capital resources.

Industry Context

The food industry, particularly confectionery and snacks, is facing increasing scrutiny and regulation, exemplified by the FDA's intent to phase out petroleum-based synthetic dyes. This trend towards 'clean label' products is influencing company strategies, such as Hershey's decision to remove certified colors. The industry also continues to grapple with significant commodity price volatility, especially for key ingredients like cocoa, which has seen elevated market prices. Geopolitical events and changes in global trade policies, including tariffs, add to economic uncertainty and supply chain costs, impacting profitability across the sector. Consumer behavior shifts and the possibility of a recession further complicate the operating environment for food manufacturers.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to global benchmarks for direct assessment against industry standards. However, the significant decline in gross margin (970 bps in Q2, 1500 bps in 6M) due to commodity costs, particularly cocoa, suggests that the company is experiencing more severe cost pressures or has less effective hedging/pricing strategies compared to some peers, or that the cocoa market impact is exceptionally severe across the industry.
• The increase in U.S. retail takeaway (18.5% total, 21.8% CMG, 6.1% Salty) and market share gains (90 bps CMG, 26 bps Salty) indicate strong consumer demand and competitive performance within its core U.S. categories, which could be considered favorable relative to general market trends if the overall market growth was lower.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to certain legal proceedings and claims arising out of the ordinary course of business, covering matters such as trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment, human and workplace rights, and tax.
• A number of tax disputes are currently underway, including multi-year controversies at various stages of review, negotiation, and litigation in Mexico, Canada, Switzerland, and the United States.
• Management believes these matters, individually and in aggregate, are not expected to have a material effect on financial condition, results of operations, or cash flows.

Stakeholder Impact

• Shareholders: Significant decrease in net income and EPS will negatively impact shareholder returns in the short term. The ongoing share repurchase program and long-term strategic initiatives aim to create future value.
• Employees: The Advancing Agility & Automation Initiative includes workforce reductions, leading to employee severance and related separation benefits, impacting some employees. Stock-based compensation plans continue to be a part of employee incentives.
• Customers: Price increases on products may impact affordability and demand, while the removal of certified Food, Drug & Cosmetic colors by 2027 aims to align with evolving consumer preferences for 'cleaner' products.
• Suppliers: Increased raw material costs, particularly cocoa, indicate pressure on supplier pricing and potentially on the company's relationships with them.
• Creditors: The issuance of $2.0 billion in new long-term debt increases the company's overall debt burden, though liquidity is deemed sufficient to meet obligations.

Next Steps

• Close the acquisition of LesserEvil, LLC by the end of 2025.
• Continue assessing the potential implications of the One Big Beautiful Bill Act on operations and financial statements.
• Continue to evaluate and take action to preserve adequate liquidity and ensure effective business operation during the current economic environment.
• Monitor ongoing negotiations related to tariffs and their potential impacts.
• Continue to evaluate the nature and extent of evolving macroeconomic impacts on the business.
• Remove all certified Food, Drug & Cosmetic colors from snacks by the end of 2027.
• Utilize the remaining $470 million under the December 2023 share repurchase authorization at management's discretion.
• Meet 2025 capital requirements, expected to be $425 million to $450 million, using existing cash and internally generated funds.
• Adopt ASU No. 2023-09, Income Taxes, in the fourth quarter of 2025.

Key Dates

Recommendation

The company's financial performance for Q2 and the first six months of 2025 was significantly worse than the prior year, marked by a substantial decline in net income and EPS, primarily due to soaring commodity costs (especially cocoa) and unfavorable derivative mark-to-market adjustments, which severely compressed gross margins. The effective tax rate also saw a notable increase. While net sales showed growth, particularly in Q2 due to volume recovery and favorable pricing, the profitability erosion is a major concern. The company is actively pursuing strategic initiatives like the Advancing Agility & Automation program, which promises significant long-term savings, and has made strategic acquisitions to expand its portfolio. However, the immediate headwinds from cost inflation and market volatility are strong. A seasoned investor would likely maintain their position to observe if these cost pressures abate and if the strategic initiatives can effectively reverse the profitability trend, but would be cautious about increasing exposure given the current financial challenges.

Keywords

Confectionery, Snacks, Cocoa, Commodity Costs, Earnings, Revenue, Profitability, Acquisitions, Supply Chain, Tariffs, ESG, SEC Filing, 10-Q