Hershey’s Kissed Off Cocoa Prices. The Surprise Was Sweet.

Sales volume for Hershey’s sweet snacks dropped 5% in the U.S. as compared with a year ago, while salty snacks saw a 26% decline, according to company’s latest earnings report.

For 2024, Hershey expects a moderate net sales growth of 2% to 3%. Earnings per share are expected to stay flat as higher costs in cocoa and sugar, as well as other one-time expenses, weigh on margins. 

“While historic cocoa prices are expected to limit earnings growth this year, we believe our strong marketing plans, innovation and brand investments will drive top-line growth and meet consumers’ evolving needs,” said CEO Michele Buck in a statement.

For the three months ended in December, Hershey on Thursday posted $2.66 billion in net sales, 0.2% up from the year-ago period. That’s 2% below the $2.72 billion Wall Street had expected. 

Adjusted earnings per share came at $2.02, flat from the same quarter last year, beating the $1.95 analysts had expected. After Thursday’s gains, the stock is down 12% over the past 12 months.     

Cocoa prices have been on a tear thanks to a rot-causing disease and drought conditions in West Africa. One month into 2024, cocoa futures are already up 24%, hitting the highest level since 1977 and more than doubled from a year ago.

Hershey is highly exposed to soaring cocoa costs. The company generates over 90% of its revenue in the U.S., nearly 90% of which came from confectionaries. Chocolate-related products make up two thirds of its total U.S. sales, according to Morgan Stanley analyst Pam Kaufman. 

Depending on how much cocoa inventory or futures contracts Hershey has left, the firm could face a 30% to 90% increase in cocoa costs this year, representing 3% to 7% of its expected sales in 2023, Kaufman wrote in a recent research note. 

Other ingredients used to make chocolate, such as sugar and butter, are becoming more expensive as well. Kaufman expects Hershey’s overall cost to increase 9% in 2024. To preserve margins, the company would have to raise retail prices by the same extent, she said.

Although all chocolate makers face the same headwind, higher prices could drive consumers to other snacks. “Chocolate brands don’t just compete with each other, but anything in the sweet and savory category,” says Nik Modi, an analyst at RBC Capital Market. 

Already, sellers of other snack categories have rolled out promotions in recent months, says Kaufman, while retailers like
Walmart
are reducing shelf space for chocolates to make room for snacks that sell better.

Hershey has been diversifying its revenue by adding salty snacks like pretzels and popcorn. In the fourth quarter, salty snack sales in North America shrank by 26% from a year ago, accounting for less than 8% of the company’s total revenue.

For now, chocolate still matters.

Write to Evie Liu at [email protected]