10-Q: Hershey's Q3 2025 Profit Plunges Amid Soaring Costs

Hershey reports a significant decline in Q3 and YTD 2025 net income and EPS, primarily due to surging commodity and tariff costs, despite net sales growth.

Summary

• Net sales increased by 6.5% to $3,181.4 million in Q3 2025 and 3.4% to $8,601.6 million for the nine months ended September 28, 2025.
• Gross profit decreased by 15.8% to $1,037.3 million in Q3 2025 and 25.8% to $2,777.9 million for the nine months, driven by higher commodity and tariff costs.
• Net income fell by 38.1% to $276.3 million in Q3 2025 and 60.5% to $563.2 million for the nine months.
• Diluted EPS decreased by 38.2% to $1.36 in Q3 2025 and 60.4% to $2.77 for the nine months.
• The North America Confectionery segment's net sales grew 5.6% in Q3 but segment income dropped 21.2% due to costs and unfavorable mix.
• The North America Salty Snacks segment's net sales grew 10.0% in Q3 and segment income increased 6.9%, driven by volume.
• The International segment's net sales grew 12.1% in Q3 but reported a loss of $13.6 million, a 195.8% decrease in income, due to higher commodity and manufacturing costs.
• The Advancing Agility & Automation (AAA) Initiative is expected to result in $400 million in ongoing annual savings by 2026.
• The company completed the acquisition of the Sour Strips brand in November 2024 and expects to close the acquisition of LesserEvil, LLC by the end of 2025.

Sentiment

Score: 3

Explanation: The company experienced significant declines in profitability (net income, EPS, gross margin, operating profit) due to high commodity costs and tariffs, despite modest net sales growth. While strategic initiatives and acquisitions are underway, the immediate financial performance is concerning.

Positives

• Net sales grew 6.5% to $3,181.4 million in Q3 2025 and 3.4% to $8,601.6 million for the nine months ended September 28, 2025.
• Favorable price realization contributed approximately 6% to net sales in Q3 2025 and 4% for the nine months.
• The North America Salty Snacks segment demonstrated strong performance with 10.0% net sales growth and 6.9% segment income growth in Q3 2025, driven by volume increases from brands like Dots Homestyle Pretzels, SkinnyPop, and Pirates Booty.
• The Advancing Agility & Automation (AAA) Initiative is expected to generate ongoing annual savings of approximately $400 million by 2026.
• Successfully issued $2.0 billion in new long-term notes during Q1 2025.
• Cash and cash equivalents increased by $432.3 million to $1.2 billion at September 28, 2025, compared to year-end 2024.
• Management believes existing liquidity is adequate to meet anticipated funding needs in both the short-term and long-term.
• Business realignment costs decreased significantly to $2.2 million in Q3 2025 from $27.6 million in Q3 2024, and to $18.8 million YTD 2025 from $32.6 million YTD 2024.

Negatives

• Net income decreased by 38.1% to $276.3 million in Q3 2025 and 60.5% to $563.2 million for the nine months ended September 28, 2025.
• Diluted EPS decreased by 38.2% to $1.36 in Q3 2025 and 60.4% to $2.77 for the nine months ended September 28, 2025.
• Gross profit declined by 15.8% in Q3 2025 and 25.8% for the nine months.
• Gross margin significantly contracted by 870 basis points to 32.6% in Q3 2025 and 1,270 basis points to 32.3% for the nine months, primarily due to higher commodity and tariff costs.
• Cost of sales increased by 22.2% in Q3 2025 and 27.4% for the nine months, driven by unfavorable commodity costs (especially cocoa) and tariffs.
• The International segment reported a loss of $13.6 million in Q3 2025 and a 57.4% decrease in income for the nine months, due to higher commodity and manufacturing costs.
• Operating profit decreased by 29.1% in Q3 2025 and 49.1% for the nine months.
• Net interest expense increased by 16.2% to $51.5 million in Q3 2025 and 13.2% to $142.1 million for the nine months, due to higher long-term debt balances.
• The effective income tax rate increased to 25.7% in Q3 2025 (from 14.0% in 2024) and to 33.3% for the nine months (from 18.6% in 2024).
• North America Confectionery volume declined approximately 1% in Q3 and 2% for the nine months, driven by price elasticity impacts.
• Unallocated mark-to-market losses on commodity derivatives totaled $387.9 million for the nine months ended September 28, 2025, compared to gains of $195.7 million in the prior year period.

Risks

• Reputation or brand image might be impacted by issues related to product quality and safety, ingredients, packaging, human and workplace rights, and other environmental, social, or governance matters.
• Disruption to manufacturing operations or supply chain could impair the ability to produce or deliver finished products.
• Inability to hire, engage, and retain talented global human capital needed to drive growth strategies.
• Risks associated with climate change and other environmental impacts, and evolving stakeholder views on climate change issues.
• Increases in raw material and energy costs, along with the availability of adequate supplies of raw materials (e.g., cocoa products experiencing elevated market prices).
• Price increases may not be sufficient to offset cost increases and maintain profitability, or may result in sales volume declines due to pricing elasticity.
• Market demand for new and existing products could decline.
• Increased marketplace competition could hurt 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.
• Failure to fully realize expected cost savings and/or operating efficiencies associated with strategic initiatives or restructuring programs (e.g., AAA Initiative).
• Changes in governmental laws, regulations, and policies, including taxes and tariffs (e.g., tariffs on U.S. imports, FDA regulations on synthetic dyes).
• Political, economic, and/or financial market conditions, including impacts from the ongoing conflict between Russia and Ukraine.
• Disruptions, failures, or security breaches of information technology infrastructure.
• Complications with the design or implementation of the new enterprise resource planning (ERP) system.
• Uncertainty regarding the scope and length of tariffs and their effects on the broader economy and business.
• The possibility of a recession, changes in consumer shopping and consumption behavior, and changes in geopolitical events.

Future Outlook

The company expects 2025 capital expenditures, including capitalized software, to be approximately $425 million, at the lower end of the previously estimated range of $425 million to $450 million, with capital spending as a percentage of net sales expected to return to historical levels. The Advancing Agility & Automation Initiative is estimated to result in total pre-tax costs of $200 million to $250 million from inception through 2026, with ongoing annual savings of approximately $400 million at its conclusion. The acquisition of LesserEvil, LLC is expected to close by the end of 2025. The company intends to remove all certified Food, Drug & Cosmetic colors from its snacks by the end of 2027, with estimated costs not expected to materially impact its financial position, results of operations, or liquidity.

Management Comments

• Experienced net sales growth, positive changes in consumer behavior, and price inelasticity throughout the first nine months of 2025, despite the persistent dynamic macroeconomic environment.
• Increasing inflationary pressures, including ongoing price volatility for select commodities and higher manufacturing costs, continued to challenge the business and led to a decrease in net income.
• Believe existing liquidity is sufficient to satisfy key strategic initiatives and other material cash requirements in both the short-term and long-term, while continuing to evaluate and take action to preserve adequate liquidity.
• Continue to monitor discretionary spending across the organization.
• May continue to experience increasing supply chain costs, higher inflation, and other impacts due to the length and severity of the fluctuating macroeconomic environment, commodity price volatility, possibility of a recession, changes in consumer behavior, and geopolitical events.
• Will continue to evaluate the nature and extent of these evolving impacts on the business, consolidated results of operations, segment results, liquidity, and capital resources.

Industry Context

The food industry, particularly confectionery and snacks, is facing significant inflationary pressures, especially for key commodities like cocoa, which has seen elevated market prices. Changes in global trade policies, including tariffs, and an evolving regulatory environment (e.g., FDA phasing out synthetic dyes) are also impacting the sector. Consumer behavior remains dynamic, with some price inelasticity observed despite strategic pricing actions. The company's focus on productivity initiatives (AAA) and portfolio expansion through acquisitions (LesserEvil, Sour Strips) reflects broader industry trends towards efficiency and diversification in a challenging cost environment.

Comparison to Industry Standards

• NA

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.
• These matters, both individually and in the aggregate, are not expected to have a material effect on the company's financial condition, results of operations, or cash flows.

Stakeholder Impact

• Shareholders: Significant decrease in net income and EPS, potentially impacting shareholder returns. Dividends paid remained consistent, and a share repurchase program with $470 million remaining is authorized.
• Employees: Workforce reductions and reallocation of resources are expected as part of the Advancing Agility & Automation Initiative, impacting employee severance and benefits. Stock-based compensation plans are in place.
• Customers: Strategic pricing actions have led to some price elasticity impacts, particularly in the North America Confectionery segment. The company is responding to evolving regulatory environments (e.g., FDA dye phase-out) to maintain consumer trust.
• Suppliers: Increased commodity costs (e.g., cocoa) and tariffs are impacting the cost of sales, which could put pressure on supplier relationships or sourcing strategies.
• Creditors: Higher long-term debt balances due to recent issuance, but the company believes it has sufficient liquidity to meet debt obligations.

Next Steps

• Close the acquisition of LesserEvil, LLC by the end of 2025.
• Continue to implement the Advancing Agility & Automation Initiative through 2026 to achieve approximately $400 million in annual savings.
• Remove all certified Food, Drug & Cosmetic colors from snacks by the end of 2027.
• Evaluate the impact of new accounting standards ASU 2023-09 and ASU 2024-03.
• Monitor the evolving impacts of the macroeconomic environment, including commodity price volatility, potential recession, consumer behavior changes, and geopolitical events.
• Utilize the remaining $470 million under the December 2023 share repurchase authorization at management's discretion.

Key Dates

Recommendation

The significant decline in net income and diluted EPS, coupled with substantial gross margin contraction due to elevated commodity costs (especially cocoa) and tariffs, indicates severe pressure on profitability. While net sales show growth, the inability to translate this into improved bottom-line performance is a major concern. The International segment's loss further highlights operational challenges. Despite ongoing productivity initiatives and strategic acquisitions, the immediate financial outlook is negative, suggesting a 'sell' recommendation for investors until there are clear signs of margin recovery and sustained profit growth.

Keywords

Confectionery, Salty Snacks, Hershey, HSY, Q3 2025, Earnings, Financial Results, SEC Filing, 10-Q, Cocoa Prices, Tariffs, Supply Chain, Gross Margin, Net Income, EPS, Acquisitions, LesserEvil, Sour Strips, AAA Initiative, Consumer Goods, Food Industry