Hershey’s Cocoa Tariff Dilemma: A Test of Resilience in Challenging Times

Hershey Company (HSY) finds itself at a critical crossroads, grappling with escalating tariffs on cocoa imports that threaten to erode its profitability and operational flexibility. With U.S. tariffs set to add up to $100 million in quarterly costs by late 2025, the chocolate giant is racing to secure exemptions while implementing aggressive cost-mitigation strategies. This article examines the financial stakes, regulatory risks, and strategic responses shaping Hershey’s trajectory, offering insights for investors navigating this complex landscape.

Ask Aime: Investors in Hershey (HSY) worry about the impact of rising cocoa import tariffs on the company's profitability and operational expenses. Could this affect Hershey's future growth and the stock price?

The Tariff Threat: A Costly Cross to Bear

Hershey’s Q1 2025 results reveal both resilience and vulnerability. While adjusted earnings of $2.09 per share surpassed analyst estimates, net income fell sharply to $425.41 million, down from $628.29 million in 2024. Sales dropped 13.8% to $2.81 billion, though this still narrowly beat forecasts. The true test, however, lies ahead.

The $100 million quarterly tariff impact projected for Q3 and Q4 stems from two factors:
1. Cocoa Tariffs: U.S. levies on cocoa beans, critical to Hershey’s chocolate products, which cannot be domestically sourced.
2. Canadian Retaliation: Counter-tariffs on U.S. imports, compounding costs as Hershey relies on Canadian suppliers for certain goods.

The company has already begun feeling the pinch: Q2 tariff costs are expected to reach $15–$20 million, with the brunt hitting later in the year. To put this in context, Hershey’s full-year adjusted EPS is projected to decline by 35% to $6.00–$6.18, a stark contrast to its 2024 EPS of $9.34.

Ask Aime: "Will Hershey's Chocolate Crisis Impact Stock Values?"

Mitigation Strategies: A Multi-Front Battle

Hershey is deploying a mix of tactical and structural measures to offset tariff pressures:
1. Pricing Adjustments: Incremental price hikes to pass costs to consumers, though this risks dampening demand in an already cautious retail environment.
2. Supply Chain Optimization: Expanding vertical integration, such as its new chocolate paste production facility, to reduce reliance on external suppliers.
3. Lobbying and Advocacy: Intensive engagement with U.S. policymakers to secure cocoa tariff exemptions, emphasizing the crop’s non-domestic viability.
4. Sourcing Reconfigurations: Diversifying suppliers to mitigate dependency on tariff-affected regions.

CEO Michele Buck’s emphasis on “every lever in the toolbox” underscores the urgency. CFO Steve Bockel added that these efforts aim to preserve a path to earnings growth in 2026, despite 2025’s projected decline.

Regulatory and Market Headwinds: Beyond Tariffs

Hershey’s challenges extend beyond tariffs. The U.S. government’s proposed ban on artificial food dyes—affecting non-chocolate candies like Twizzlers and Jolly Ranchers—could disrupt sales. However, the company claims to have already transitioned to natural colorings, mitigating immediate risks.

Consumer spending trends also loom large. A 3.6% decline in U.S. same-store sales in Q1—Hershey’s steepest drop since 2020—reflects weak demand for discretionary items. This, combined with rising SG&A expenses (up ~15% in Q2), adds pressure on margins.

Leadership and Long-Term Outlook

Hershey’s strategic roadmap hinges on CEO Michelle Buck’s impending retirement in 2025. The transition to new leadership must sustain initiatives like the Reese’s product innovation (launched late 2024) and international expansion in high-growth markets such as Brazil and India.

Conclusion: Navigating the Storm

Hershey’s ability to secure cocoa tariff exemptions will be pivotal. If denied, the $100 million quarterly hit could further compress margins, potentially derailing its 2% sales growth target for 2025. Conversely, successful mitigation—through pricing, lobbying, and operational agility—could position the company to rebound in 2026.

Investors should weigh the risks against Hershey’s enduring brand strength and diversified portfolio. With a 47.42% gross margin and a “GOOD” financial health rating, the company retains resilience. However, near-term volatility remains likely, as tariff outcomes and consumer sentiment evolve.

For now, Hershey’s stock—down 1.91% pre-market post Q1 results—offers a mixed signal. Analysts highlight its undervalued status at a 2025 fair value of ~$160 (versus current ~$145), suggesting potential upside if mitigation strategies succeed. Investors must monitor tariff negotiations, EPS trajectories, and leadership transitions closely. The road ahead is fraught with uncertainty, but Hershey’s history of innovation and adaptability offers cautious optimism.