How Rising Cocoa Prices and Consumer Behavior Affect HSY's Future

Hershey's Financial Performance - The company's adjusted gross margin contracted by 460 basis points to 40.3% in Q3 2024, driven by increased commodity costs, unfavorable timing of input costs, fixed cost deleverage, and negative product mix [2] - Adjusted operating profit declined 13.2% YoY to $654 million, with the operating profit margin contracting 300 basis points to 21.9% [18] - Net sales declined 1.4% in Q3 2024, with price increases partially offset by volume declines [21] - Adjusted EPS fell 10% in Q3 2024 due to lower sales and declining gross margins [21] Hershey's Market Challenges - The company faces historically high cocoa prices and a budget-conscious consumer base, leading to softer snacking consumption in Q3 2024 [9] - Consumer behavior has shifted towards value-seeking, reducing foot traffic to convenience and drug stores where Hershey's brands are over-indexed [9] - Shopping shifts to club, dollar, and online channels, where the company's products are less developed, are further complicating matters [22] - Increased competition across all product segments is adding to the company's challenges [22] Hershey's 2024 Outlook - The company expects its 2024 adjusted gross margin to decline nearly 250 basis points due to reduced volume outlook, persistent channel and product mix challenges, and inflation impact on key ingredients [7][17] - Hershey lowered its 2024 sales guidance to nearly flat YoY, down from the previous forecast of around 2% growth [15] - Full-year adjusted EPS is now projected to decline by mid-single digits, a revision from the earlier outlook of only a slight decline [15] Industry Comparison - Hershey's stock has declined 11.8% over the past three months, compared to the industry's decline of 9.3% [5] - The company currently carries a Zacks Rank 5 (Strong Sell) [12] Alternative Consumer Staples Stocks - Ingredion Incorporated (INGR) carries a Zacks Rank 2 (Buy) and has a trailing four-quarter earnings surprise of 9.5% on average [8][13] - Freshpet (FRPT) carries a Zacks Rank 2 and has a trailing four-quarter earnings surprise of 144.5% on average [19] - US Foods Holding Corp (USFD) carries a Zacks Rank 2 and has a Zacks Consensus Estimate for current fiscal-year sales and earnings growth of 6.4% and 18.6%, respectively [14][16][20]