The Hershey Company's Q3 2025: Contradictions Emerge on Price Elasticity, Tax Rates, and Tariff Mitigation

Guidance:

• Plan for 2026 is to play for the long term while rebuilding margin; long-term top-line algorithm ~2%–4%.
• EPS: potential upside to algorithm but management will balance investment and margin recovery.
• Elasticity assumption for 2026 planning: approximately -1%.
• Cocoa: modeled as inflationary for full year but moderating; hedges being layered.
• Tariffs: modeled ~$200M incremental headwind; modest optimism on trade progress.
• Q4 impact: international shipment timing may depress near-term results; expect NA CMG momentum to continue.
• Continue brand and innovation investments into 2026.

Business Commentary:

• 2026 Revenue and Earnings Outlook:
• Hershey anticipates a non-algorithm top and bottom line year in 2026, consistent with previous commentary, despite not expecting much more significant year-over-year EPS growth.
• The company aims to grow in line with or ahead of the category while restoring margins to their full potential, focusing on balanced growth across its portfolio.

• Current momentum and a balanced approach to margin recovery are expected to maintain Hershey's long-term algorithm of 2% to 4% revenue growth and accommodate potential upside on EPS.

• Elasticity and Pricing Management:

• Hershey reported double-digit growth in everyday CMG since introducing price increases, with no significant concerns regarding consumer responses.
• Current category elasticity is expected to be minus 1 for 2026 planning purposes, which aligns with recent price increases and expected consumer behavior.

• A balanced approach to pricing and continued attention on retail partnerships is crucial to sustaining consumer demand.

• Halloween Sales Disappointments and Learnings:

• The Halloween season started slower than expected, with only a third of sales anticipated in the last week, given the holiday's timing on a Friday.
• Hershey is using this season as an opportunity to analyze consumer insights and adjust product offerings and marketing strategies for future seasons, focusing on pack types and pricing.

• The company acknowledges the need to improve sales performance in timed seasonal events and enhance consumer engagement.

• Innovation and Core Brand Growth:

• Recent innovation, particularly the REESE'S Oreo launch, has been a significant driver of growth, contributing significantly to the category's performance.
• Hershey's core business achieved close to 5% growth without the impact of REESE'S Oreo, indicating balanced growth across the portfolio.
• A consistent focus on innovation alongside core brand investments is essential to maintain growth momentum and consumer engagement.

Sentiment Analysis:

Overall Tone: Positive

• "I'm really delighted with the balanced growth..."; management said they're "feeling a bit better from a cocoa standpoint" and repeatedly noted the category is "resilient" and momentum in CMG is continuing (double-digit recent everyday growth).

Q&A:

• Question from Andrew Lazar (Barclays Bank PLC): How do you balance moderated cocoa, tariff changes, base momentum and elasticity as you plan for 2026 and EPS expectations?
  Response: Management: Prioritize balanced growth and margin rebuild; target long-term revenue algorithm 2%–4% while investing in brands — EPS upside possible but pursuing multi-year margin recovery rather than one-year restoration.

• Question from Andrew Lazar (Barclays Bank PLC): Early reads on elasticity as pricing continues to flow through?
  Response: CFO: Early signs are rational and in line with expectations; planning elasticity at roughly -1% for 2026 and currently have no concerns.

• Question from Max Andrew Gumport (BNP Paribas Exane): Given double-digit recent everyday CMG growth, what does that imply for elasticity?
  Response: CFO: Everyday CMG up double digits in last 4 weeks — positive early signal; still monitoring before firming views.

• Question from Max Andrew Gumport (BNP Paribas Exane): What are you seeing on competitive pricing cadence?
  Response: CEO/CFO: Competitors are phasing pricing differently; Hershey is taking a consumer-first, deliberate cadence and sees no concerning aggregate price gaps.

• Question from David Palmer (Evercore ISI): How disappointing was Halloween and what drove the weakness?
  Response: CEO: Season got off slow (Halloween on a Friday shifts ~1/3 of sales to last week); not broad-based but will analyze pack types, entry price points and mix to improve next year.

• Question from David Palmer (Evercore ISI): Are retailers sympathetic to your pricing given cocoa dynamics and hedging?
  Response: CEO: Strong customer partnerships; noted cocoa remains ~70% above 2023 levels, company hedged well in 2025 and is actively partnering with retailers on solutions.

• Question from Leah Jordan (Goldman Sachs): How are you thinking about the 2026 innovation pipeline and balance with core?
  Response: CEO: Robust pipeline; REESE'S Oreo continues to support growth into next year, but strategy balances innovation with core growth — cannot rely solely on innovation.

• Question from Leah Jordan (Goldman Sachs): Where were increased brand investments and do you need more?
  Response: CEO: Incremental digital and performance marketing for Halloween/holiday and innovation support; investing more efficiently rather than simply increasing spend.

• Question from Megan Christine Alexander (Morgan Stanley): Any change to prior view on EPS upside given cocoa and tariffs?
  Response: CFO: Slightly more optimistic on cocoa and tariffs versus last quarter; layering hedges now, but still modeling cocoa inflation and $200M tariff impact while watching developments.

• Question from Megan Christine Alexander (Morgan Stanley): What explains implied Q4 softness versus Street?
  Response: CFO: Primarily international shipment timing; U.S. CMG momentum expected to continue but EPS is tempered by investments and less favorable cocoa hedge timing versus Q3.

• Question from Thomas Palmer (JPMorgan Chase & Co): If ~1/3 of Halloween sells in last week, will that align with guidance?
  Response: CEO: Even with that catch-up, the season would likely still be somewhat soft this year; management will analyze and act on insights.

• Question from Thomas Palmer (JPMorgan Chase & Co): If cocoa turns deflationary next year, will you give back pricing?
  Response: CFO: Cocoa may trend down in 2026 and program allows downside participation, but pricing won't be given back in 2026; continue using productivity, transformation and other levers for balanced recovery.

• Question from Peter Galbo (BofA Securities): Could European pricing dynamics translate to the U.S. and create gaps?
  Response: CFO: Markets differ; U.S. CMG remains resilient and rational today, and management sees no reason to expect European dynamics to replicate here.

• Question from Peter Galbo (BofA Securities): International was loss-making this quarter — should we expect a longer drag?
  Response: CFO: International is cocoa-intensive and has felt the brunt; pricing/elasticity has been tougher there, but share gains are occurring and management expects eventual profitability recovery over time.

• Question from James Salera (Stephens Inc.): What drove salty-snacks strength and outlook into Q4?
  Response: CEO: Strong brand execution (SkinnyPop, Dot's, Pirate's Booty), portion/multipack and permissible/premium snacking drove volume and share; pipeline of salty innovation supports continued growth.

• Question from Robert Moskow (TD Cowen): Is elasticity the biggest determinant of double-digit EPS potential and will you widen guidance ranges?
  Response: CFO: Elasticity and cocoa are key drivers; elasticity is being watched closely and management will consider wider ranges when providing future guidance.

• Question from Robert Moskow (TD Cowen): Are convenience king-size price gaps temporary?
  Response: CFO: Some pack-level gaps exist and many are closing; in aggregate the gaps are not currently cause for concern.

• Question from Alexia Howard (Bernstein): How is the C-store channel performing and recovery status?
  Response: CEO: Convenience is strong (CMG ~+6) with focused merchandising standards and retailer partnerships; momentum improving but management remains focused on execution.

• Question from Alexia Howard (Bernstein): Can you quantify percent of sales from recent innovation?
  Response: CEO: Did not provide a numeric percent; emphasized that recent innovation (REESE'S Oreo) elevated core and that consistent, balanced innovation is the priority.

• Question from Scott Marks (Jefferies): What are you seeing in consumer health heading into holidays and 2026?
  Response: CEO: Consumer remains pressured but the CMG category is resilient; management is confident in category performance despite macro headwinds.

• Question from Scott Marks (Jefferies): Potential SNAP program headwinds?
  Response: CEO: SNAP represents ~2% of category dollars; current view is minimal impact to the business in 2026 but it's being monitored.

• Question from Michael Lavery (Piper Sandler): How are you positioned if cocoa falls further and what flexibility exists in your hedging?
  Response: CFO: Hedging is at normal levels with a mix of fixed positions and downside participation; full year still modeled inflationary but downside participation allows benefit if cocoa continues to decline.

• Question from Michael Lavery (Piper Sandler): What percent of portfolio remains under $4 after latest pricing?
  Response: CEO: Approximately 75% of units remain below $4, largely unchanged.

• Question from Christopher Carey (Wells Fargo): If cocoa doesn't fall, would you need further pricing in 2026; and what's happening with the tax rate?
  Response: CFO: Do not anticipate additional pricing in 2026; tax rate this year affected by reserve adjustments, procurement strategies with lower tax efficiency, and fewer attractive tax credit opportunities — more guidance to come.

• Question from John Baumgartner (Mizuho Securities): How has competition for high‑visibility merchandising in convenience evolved and how will Hershey respond?
  Response: CEO: Retail merchandising and loyalty tools have evolved; Hershey focuses on being a growth driver via innovation, improved in‑store execution and retailer partnerships.

Contradiction Point 1

Price Elasticity Assumptions

It involves differing assumptions about price elasticity, which directly impacts revenue projections and strategic planning.

What are your current observations on pricing elasticity? How does this impact your 2026 guidance? - Andrew Lazar (Barclays Bank PLC)

2025Q3: It's early days, but nothing deviates from expectations. The category is rational, and most pricing has come to shelf. Elasticity, as a big assumption for 2026 guidance, is at minus 1. This is an appropriate center cut, though the current year has seen better elasticity due to long Easter and merchandising benefits. - Steven Voskuil(CFO)

Is the 1:1 pricing elasticity in '25 reasonable for '26? - Andrew Lazar (Barclays)

2025Q2: Our teams have modeled the pricing exhaustively. The elasticities are more favorable due to pricing breadth. Some parts of the portfolio are less elastic. We expect mid-teens impact in '26, with 80% of profit benefit in '26 and some flow-through into '27 on seasons. - Steven E. Voskuil(CFO)

Contradiction Point 2

Tax Rate Assumptions

It involves differences in expectations for tax rates, which have significant implications for financial performance and profitability.

Can you explain the tax rate changes? - Christopher Carey (Wells Fargo Securities, LLC)

2025Q3: Tax rate adjustments due to legacy positions, procurement strategies, and tax credit opportunities. We'll provide more clarity on next year's tax rate later. - Steven Voskuil(CFO)

How will the announced price increase impact next year's P&L if cocoa futures hold at current levels? - Max Andrew Stephen Gumport (BNP Paribas Exane)

2025Q2: We now expect our effective tax rate for 2025 to be approximately 17.5% to 18%, slightly down from our previous guidance of 18.5% to 19%. - Steven E. Voskuil(CFO)

Contradiction Point 3

International Segment Performance

It involves differing expectations for the performance of the international segment, impacting overall company growth projections.

What should we expect next given the international loss-making quarter? - Peter Galbo (BofA Securities)

2025Q3: International is challenging due to cocoa-driven markets and elasticity. We're optimistic about share growth, but profitability will take time. We're managing the cocoa challenges. - Steven Voskuil(CFO)

What factors contributed to the recent acceleration in nonseasonal performance? - Megan Christina Alexander (Morgan Stanley)

2025Q2: International performance was in line with our expectations. However, we continue to see pressure from the highways of tariffs and high cocoa prices in the region. - Steven E. Voskuil(CFO)

Contradiction Point 4

Elasticity Expectations

It involves differing expectations regarding price elasticity, which directly impacts revenue forecasts and financial planning.

How do you view your 2026 outlook? How do you balance cocoa cost moderation with expected inflation in shaping next year's outlook? - Andrew Lazar (Barclays Bank PLC)

2025Q3: It's early days, but nothing deviates from expectations. The category is rational, and most pricing has come to shelf. Elasticity, as a big assumption for 2026 guidance, is at minus 1. - Steven Voskuil(CFO)

Does the EBITDA outlook suggest better-than-expected conditions? - Max Gunport (BNP Paribas Exane)

2025Q1: We tend to think we've seen a bit more than minus 1 elasticity in the U.S. market, particularly in the chocolate business. - Steve Voskuil(CFO)

Contradiction Point 5

Tariff Mitigation and Impact

It concerns the company's strategy and effectiveness in mitigating tariff-related costs, which directly influences financial performance and strategic planning.

What insights are you seeing on pricing elasticity and its relation to your 2026 guidance? - Andrew Lazar (Barclays Bank PLC)

2025Q3: We have a path to return to growth in 2026 and then accelerate beyond 2027 through strong brand innovation, steady category share growth, and the execution of our transformation agenda, all while navigating and mitigating the impact of tariffs and persistent cocoa cost inflation. - Kirk Tanner(CEO)

What is the risk if the tariff exemption isn't approved promptly? What risk level is - Ken Goldman (JPMorgan)

2025Q1: For Q2, we have enough clarity that the tariff impact will be mitigated by our inventory levels. For Q3 and Q4, the unmitigated impact could be up to $100 million per quarter. - Steve Voskuil(CFO)