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A sour economic backdrop, elevated cocoa prices, and disappointing marketing performance set the stage for another lackluster quarterly report from Hershey Foods (HSY -2%). The chocolate and snack food giant missed adjusted earnings estimates by double-digits in back-to-back quarters in Q3 on lighter-than-expected revenue. With headwinds unabating, HSY trimmed its FY24 guidance, slicing around $0.49 off its earnings outlook and predicting revenue growth to stagnate yr/yr, a retreat from its previous +2% growth estimate.

• Cocoa prices have gradually declined from the crazy levels they reached earlier this year. However, they are still up over 40% from last year. To preserve its margins, HSY has been forced to pass these prices onto consumers, who are already contending with higher prices across much of their budgets. HSY noted that consumers across all incomes continue to make budgetary tradeoffs, shifting their shopping behavior toward channels like club, dollar, and online stores, where it has less developed exposure.
• At the same time, HSY's retail partners are managing inventory more tightly. Additionally, HSY is dealing with increasing competitive pressures, noting that in the U.S., it lost share to smaller players and private labels, particularly in the take-home chocolate category. Adding to the headaches, HSY commented that its promotional programming fell short of expectations during the quarter.
• These problems culminated in total snacking consumption softening to just +0.1% in the quarter, down meaningfully from the +0.9% -- an already weak figure -- in Q2. As a result, HSY delivered another quarter of underwhelming performance. HSY's adjusted EPS slid by 10.0% yr/yr to $2.34 on a 1.4% drop in revenue to $2.99 bln. Discouragingly, the issues are sticking around for the near term, eroding HSY's FY24 guidance.

What is HSY doing to counter economic troubles? Management noted that it is sharpening its seasonal planning. Already, the company feels good about the second-half growth plans discussed last quarter gaining momentum. For instance, sweets consumption accelerated from +5% in August to +23% in October, reflecting decent demand during Halloween.

Over the long term, HSY has outlined its priorities for returning to growth. First and foremost, HSY is looking to reignite the demand for chocolate. Trade and media investment is being redeployed to support HSY's many chocolate brands. Also, new offerings like freeze-dried Jolly Rancher candies are being rolled out to support HSY's confectionery business recovery. Meanwhile, HSY is prioritizing sustaining upward momentum in its salty snacks division, leaning on celebrity brand ambassadors and further media investments. Overseas, HSY is focusing on growth markets, including Latin America, the U.K., Australia, and India.

Overall, it was another tough quarter for the chocolate maker. While cocoa fundamentals are improving, it could take time before a recovery in West Africa (where cocoa is primarily harvested) and production growth across the rest of the world materializes. However, HSY is optimistic that 2025 should see the early innings of these trends, predicting positive sales growth, setting up the company to begin accelerating growth heading into 2026.