Hershey’s sales and earnings remained relatively unchanged in the fourth quarter, despite facing challenges from increased cocoa costs and softer consumer demand. Surprisingly, investors viewed this as positive news, leading to a 6.6% increase in the company’s stock value.
Price Hikes and Fluctuating Demand
To combat rising costs, Hershey raised its product prices by 6.5% compared to the previous year. While snacking remains popular, there are now indications of weakening demand as consumers react to these higher prices.
In the United States, sales volume for Hershey’s sweet snacks saw a significant 5% decline compared to the previous year. Salty snacks fared even worse, experiencing a staggering 26% decrease, according to the company’s latest earnings report.
2024 Outlook and Challenges Ahead
Looking ahead to 2024, Hershey anticipates a modest net sales growth of 2% to 3%. However, the company expects earnings per share to remain flat due to escalating cocoa and sugar costs, along with additional one-time expenses, which will put pressure on profit margins.
Despite these challenges, Hershey’s CEO, Michele Buck, remains optimistic. Commenting on the situation, Buck stated, “While elevated cocoa prices may hinder earnings growth this year, we are confident that our robust marketing strategies, innovative initiatives, and brand investments will drive revenue growth and cater to evolving consumer needs.”
Q4 Financial Performance
For the three months ending in December, Hershey’s reported net sales of $2.66 billion, marking a slight increase of 0.2% compared to the same period the previous year. Unfortunately, this figure fell slightly short of Wall Street’s expectations of $2.72 billion.
On the other hand, adjusted earnings per share remained steady at $2.02 for the fourth quarter, surpassing analysts’ projected figure of $1.95. Despite this positive news, the company’s stock has experienced a decline of 12% over the past 12 months.
Rising Cocoa Prices Present a Challenge
One of the contributing factors to Hershey’s financial outlook is the surge in cocoa prices. This uptrend is primarily attributed to a disease affecting cocoa plants and drought conditions throughout West Africa. In just one month of 2024, cocoa futures have already jumped by 24%, reaching their highest level since 1977 and more than doubling compared to a year ago.
Hershey’s Cocoa Costs Soar, Threatening Margins
Hershey, the renowned chocolate company, is facing significant challenges due to the skyrocketing cocoa costs. With more than 90% of its revenue generated in the U.S., Hershey heavily relies on confectioneries, which account for almost 90% of its total sales. According to Morgan Stanley analyst Pam Kaufman, about two-thirds of Hershey’s U.S. sales come from chocolate-related products.
Kaufman’s recent research note reveals that depending on Hershey’s remaining cocoa inventory or futures contracts, the company might experience a staggering 30% to 90% increase in cocoa costs this year. This rise translates to 3% to 7% of Hershey’s projected sales in 2023.
While cocoa costs pose a significant challenge, other chocolate-making ingredients such as sugar and butter are also becoming more expensive. Kaufman predicts an overall 9% increase in Hershey’s costs for 2024. To protect their margins, the company will likely have to raise retail prices by a similar percentage.
Although all chocolate makers are affected by these cost increases, there is a possibility that higher prices could drive consumers towards alternative snacks. Nik Modi, an analyst at RBC Capital Market, emphasizes that chocolate brands not only face competition within their own industry but also from other sweet and savory categories.
In response to these challenges, sellers of alternative snacks have already started offering promotions in recent months. Kaufman also mentions that retailers like Walmart are reducing shelf space allocated to chocolates in favor of snacks with better sales performance.
To diversify its revenue streams, Hershey has been incorporating salty snacks like pretzels and popcorn into its product lineup. However, in the fourth quarter, sales of these salty snacks in North America decreased by 26% compared to the previous year, making up less than 8% of Hershey’s total revenue.
Despite the evolving landscape, chocolate still holds great significance in the market.
