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Surging cocoa prices have been a sticky mess throughout the past several quarters for Hershey Foods (HSY +4%), putting outsized pressure on the chocolate and snack food titan's earnings. HSY does not anticipate cocoa prices to ease anytime soon, either, warning that this headwind will continue to pressure its bottom line significantly in 2025.

However, HSY's focus on fueling top-line and share momentum while making progress on its efficiency programs has provided some much-needed investor relief today.

• HSY exited a tumultuous FY24 on a high note, delivering double-digit earnings upside, a return to exceeding estimates following back-to-back quarters of misses. This came on a healthy 8.7% improvement in revenue yr/yr to $2.89 bln, reversing two straight quarters of yr/yr contractions. The gains in the quarter reflected benefits from HSY's strategies, such as media investments and new product launches, including Reese's Lava Big Cup, Shaq-a-licious XL Gummies, and Jolly Rancher Ropes.
  • North American Salty Snacks retail sales led the charge in Q4, accelerating to 7.1% yr/yr, led by the sustained demand for SkinnyPop and Dot's Pretzels. Part of HSY's media investment involves bringing on a new celebrity spokesperson for its SkinnyPop brand, which the company noted will roll out soon.
  • U.S. Candy, Mint and Gum retail sales increased by 2% yr/yr, supported by seasonal strength, with sales inching 2.5% higher during Halloween and 1.1% higher during the holiday season. Pricing played a role in the quarter, edging 4% higher, slightly above the company's expectations, driven by carryover pricing from 2023. HSY anticipates this level to persist in 2025, with a planned price realization of 3-4% in its U.S. Confection segment.
  • International sales were solid, delivering double-digit constant currency organic sales growth in Mexico and the EMEA region. Reese's was a major contributor, posting double-digit revenue growth across international markets.
• Turning to cocoa, HSY noted it had good visibility into its costs and supply. Management stated that current sky-high prices of cocoa, which tripled in just four months to start 2024, pulling back only moderately since, are not reflective of market fundamentals, noting that global demand will plummet due to persistent high market prices. HSY added that it was already seeing signs of cocoa end users adapting through reformulation and hedging mechanisms, which it anticipates will accelerate.
• Still, in the short term, earnings will remain pressured, reflected by HSY's FY25 adjusted EPS outlook of $6.00-6.18, a 35% plunge from FY24 at the midpoint. However, HSY's FY25 revenue growth forecast of at least +2% was better than expected, showcasing decent brand loyalty and building on upward momentum from Q4. Meanwhile, the company is improving its cost structure, aiming for around $900 mln in savings between 2023 and 2026.

Cocoa prices are continuing to be a painful thorn in HSY's side. However, the company is not melting under this pressure. While FY25 earnings look weak, HSY continues to conduct the right moves to position itself for growth over the long run.