Shares of Hershey experienced significant volatility on Thursday following the release of its latest quarterly earnings report, with soaring cocoa prices contributing to the company’s worst profit performance in seven years.
Hershey’s Earnings Report: A Bitter Pill
Hershey’s stock fell sharply by 3.5% at market open, marking what could have been its worst trading day of the year. The shares later recovered slightly, ending with a more modest 1% loss. This decline followed the company’s second-quarter financial results, which revealed substantial underperformance.
Key Financial Metrics
- Earnings Per Share (EPS): Hershey reported an EPS of $1.27, falling short of the analyst consensus estimate of $1.44.
- Profit Decline: The company’s profits plummeted by 37% year-over-year.
- Revenue: Hershey generated $2.1 billion in Q2 revenues, missing the forecast of $2.3 billion, and reflecting a 17% decline from the previous year.
- Net Income: At $181 million, this marks Hershey’s least profitable quarter since Q1 2017.
In light of these results, Hershey has revised its full-year profit guidance from no change to a 1% to 3% decline, signalling its first annual profit decrease since the 2018-2019 period.
What’s Behind Hershey’s Profit Drop?
Hershey CEO Michele Buck attributed the slowdown in sales to “consumers pulling back on discretionary spending,” reflecting a tightening consumer environment. However, the more pressing issue is the unprecedented surge in cocoa prices.
Rising Cocoa Prices Impact
- Cocoa Futures: Prices for cocoa futures have skyrocketed to record highs, driven by adverse weather conditions and poor crop yields in key producing regions of Western and Central Africa.
- Price Inflation: Cocoa is now more than three times as expensive as it was three years ago. This dramatic increase has severely impacted Hershey’s profit margins.
- Supply Chain and Cost Pressures: CFO Steven Voskuil highlighted that the effects of high cocoa prices are “more than offsetting” gains from net price realisation and improvements in supply chain productivity.
Hershey’s Product Portfolio and Market Position
Hershey is renowned for its popular candy brands, including Hershey’s Kisses, Reese’s Peanut Butter Cups, and Kit Kat. In addition to its chocolate offerings, the company markets non-chocolate products like SkinnyPop popcorn and Ice Breakers mints.
Market Standing
- Industry Position: Hershey ranks as the third-largest American food maker by market value, trailing behind Mondelez and Kraft Heinz.
- Food Stock Trends: Food stocks, in general, have been struggling, with Hershey down 15% over the past year. Comparatively, Mondelez is down 8%, Kraft Heinz is down 1%, and Nestlé has experienced a 17% decline, excluding dividends.
Looking Ahead
Hershey’s current financial struggles highlight the significant challenges faced by companies dependent on commodities subject to volatile price swings. As cocoa prices continue to impact profit margins, the company will need to navigate these headwinds while managing consumer expectations and spending patterns.
Strategic Responses
- Cost Management: Hershey will likely need to focus on cost control and operational efficiency to mitigate the impact of high cocoa prices.
- Pricing Strategies: Adjustments in pricing strategies might be necessary to balance consumer affordability with profit margins.
Conclusion
Hershey’s recent earnings report underscores the profound impact of rising cocoa prices on the company’s profitability. As it faces its worst profit performance in seven years, the chocolatier must adapt to these challenging conditions and seek strategies to stabilise its financial performance in the coming quarters.
Stay tuned for further updates on Hershey’s financial health and market strategies.
