Hershey's Earnings Clouded by Tariffs and Inflation: A Morgan Stanley Perspective

The Hershey Company (HSY) faces significant hurdles to its earnings visibility in 2025, with tariffs, inflation, and margin pressures casting a shadow over its financial outlook. In a recent analysis, Morgan Stanley highlighted the risks facing the confectionery giant, emphasizing that near-term uncertainty could delay a return to growth until 2026. Below, we dissect the key risks, mitigation strategies, and investment implications for shareholders.

Ask Aime: What's going wrong for Hershey?

Financial Performance: A Mixed Start to 2025

Hershey reported Q1 2025 earnings that were uneven. While EPS rose 6.1% to $2.09, beating estimates by $0.12, revenue fell short of expectations, landing at $2.81 billion versus the $2.84 billion forecast. The revenue miss, driven by weak volume trends and pricing pressures, sent shares down 1.91% pre-market to $167.19.

Ask Aime: Is Hershey Company's (HSY) weak volume trends affecting its future growth projection?

The bigger concern lies ahead: management warned of a 700 basis point decline in Q2 gross margins, largely due to tariff impacts and rising input costs. This margin squeeze, combined with elevated SG&A expenses (projected to grow high teens year-over-year in Q2), has raised alarms about near-term profitability.

Tariff Threats: A $100M Quarterly Headwind

Morgan Stanley’s analysis underscores that tariffs are the largest immediate risk. Unmitigated tariff costs from cocoa imports and Canadian goods could reach $100 million per quarter in the second half of 2025. These tariffs stem from U.S. trade disputes, including unresolved conflicts with China and Canada, which are now weighing on Hershey’s supply chain.

To combat these costs, Hershey is pursuing aggressive pricing strategies (e.g., an 8% price increase year-to-date) and supply chain reconfigurations. A $1 billion investment in chocolate processing capacity—a move to reduce reliance on imports—is nearing completion, which should help stabilize margins over time. However, the company admits that legislative outcomes and trade negotiations remain "too uncertain" to provide full-year guidance.

Inflation Pressures: Input Costs and Consumer Behavior

Input costs, particularly cocoa and packaging, remain stubbornly high. Cocoa prices account for two-thirds of the projected $100M quarterly tariff impact, reflecting Hershey’s reliance on global commodity markets. Meanwhile, SG&A expenses are rising as the company resumes marketing spend post-ERP system stabilization, compounding margin pressures.

Consumer demand, however, has shown resilience. The confectionery category’s "emotional value" has sustained sales, even as everyday chocolate volume dipped 4.5% due to price hikes. Management noted that premium products like dark chocolate and indulgent snacks are performing strongly, suggesting a shift toward quality over quantity.

Strategic Initiatives and Risks Ahead

Hershey is betting on innovation and geographic diversification to offset near-term pain:
- Product launches: The 2024 Reese’s innovation is on track to drive growth, with management calling it the brand’s "biggest ever."
- International expansion: Markets like Brazil and India are outperforming, though currency fluctuations and local competition pose risks.
- Cost efficiency: Sourcing optimizations and lobbying efforts aim to reduce tariff exposure, but progress hinges on geopolitical outcomes.

Analyst Concerns and Valuation

Morgan Stanley’s cautious stance reflects broader macroeconomic risks. The firm warns that U.S. tariffs could reduce GDP growth by 0.6% in 2025 and 0.5% in 2026, squeezing consumer spending power. For Hershey, this translates to a "wait-and-see" stance until mitigation efforts prove effective.

Investors are split: some see Hershey’s undervalued stock (trading near 14.5x 2026 EPS estimates) as a bargain, while others cite risks like SNAP restrictions (though deemed low-impact) and private-label competition. Analyst price targets range from $120 (bearish) to $211.56 (bullish), with consensus at $180.

Conclusion: A Bumpy Road to 2026

Hershey’s path to earnings recovery hinges on three factors:
1. Tariff resolution: A $100M quarterly tariff hit is unsustainable without legislative relief or price hikes that don’t erode volume.
2. Margin stabilization: Gross margins must rebound from Q2’s 700 basis point drop, aided by the new supply chain investments.
3. Consumer resilience: Premium brands and international markets must offset U.S. demand volatility.

While Morgan Stanley’s analysis paints a cautious picture, long-term investors may find value in Hershey’s 110-year brand equity and strategic initiatives. However, with near-term EPS expected to decline mid-30% due to tariffs, patience—and a tolerance for volatility—are required. The stock’s current valuation offers upside if mitigation efforts succeed, but the path to 2026 growth is anything but clear.

Final Take: Hershey is a "high-conviction" hold for investors willing to bet on its turnaround, but with a caveat—tariff risks must abate, and margins must rebound. Monitor Q2 results closely for clues on whether the company is navigating these challenges effectively.