Hershey (HSY) Q2 2025 earnings review
Margin Collapse and Tariff Shock Overshadow Misleading Revenue Beat
Hershey reported a headline-grabbing 26% YoY revenue increase, but this was an anomaly caused by lapping last year's ERP system implementation. A clearer picture is the first-half growth of just 1.7%. The real story is a severe profitability crisis: Adjusted Gross Margin compressed 510 basis points to 38.1% under the pressure of record cocoa costs. Compounding this, the company introduced a new major headwind, guiding to a $170-$180 million tariff impact for FY25, forcing another cut to its Adjusted EPS forecast, which is now expected to fall 36-38%. To combat this, management announced aggressive price hikes for 2026, signaling a difficult path ahead to reclaim lost margins.
🐂 Bull Case
Management announced significant price increases for 2026, which they state could support over 500 basis points of gross margin expansion, demonstrating confidence in brand strength and a clear plan to recover profitability.
The North America Salty Snacks segment was a bright spot, growing sales 8.8% and expanding segment margin by 310 basis points. This demonstrates the value of portfolio diversification away from cocoa-dependent products.
Despite a brutal 2025, management has guided for a return to 'on-algorithm' top-line and earnings growth in 2026, signaling to investors that the current pressures are viewed as manageable and temporary.
🐻 Bear Case
Adjusted gross margin fell to 38.1%, a 510 basis point YoY decline, as historic cocoa inflation overwhelms pricing and productivity efforts. This is the lowest level in recent quarters and shows the earnings power is severely impaired.
The company introduced a new, material $170-$180 million pre-tax headwind from tariffs for FY25, adding another significant layer of cost pressure on top of record cocoa prices.
For the second consecutive quarter, FY25 Adjusted EPS guidance was lowered, now to a 36-38% decline. This signals deteriorating profitability and reduces confidence in near-term forecasts.
⚖️ Verdict: 🔴
Bearish. The Q2 results confirm that Hershey's profitability is under severe, compounding pressure from both cocoa and now tariffs. The misleading 26% revenue growth masks an underlying business with minimal organic growth and crumbling margins. While the pricing plan for 2026 is a credible long-term positive, the near-term outlook for 2025 has worsened significantly.
Key Themes
Profitability Crisis: Cocoa and Tariffs Crush Margins
The core issue facing Hershey intensified this quarter. Record cocoa prices drove Adjusted Gross Margin down to 38.1%, a steep 510 basis point drop from last year. This pressure is now compounded by a newly quantified $170-$180 million annual tariff impact, which was the direct cause for lowering the full-year Adjusted EPS growth forecast to a decline of 36-38%. Despite increasing their savings target to $150M, it is not enough to offset the new headwinds.
Path to Recovery: Aggressive 2026 Pricing
In response to the cost crisis, management is taking decisive action with a major price increase set for 2026. This is expected to drive a mid-teens price realization in North America Confectionery. Management stated this action alone could support '500 basis points or more of gross margin expansion' before other factors, representing the clearest path back to historical profitability and the primary pillar of the 2026 bull case.
Revenue Beat Is a Head Fake
The reported 26.0% revenue growth is highly misleading and should be disregarded. It was primarily driven by lapping a significant inventory reduction in Q2 2024 related to an ERP system implementation. A more accurate measure of performance is the first-half 2025 revenue growth of only 1.7%, which is consistent with the full-year guidance of 'at least 2%' and indicates a business with very low underlying growth.
Salty Snacks Portfolio Delivers
The North America Salty Snacks segment provided a crucial offset to the struggles in confectionery. Sales grew a healthy 8.8% to $315.5 million, and more importantly, segment income jumped 27.4%, leading to a 310 basis point margin expansion to 21.1%. Strong performance from SkinnyPop and Dot's pretzels highlights the success of this diversification strategy.
International Segment Struggles
The International segment is a notable laggard. Despite a 4.4% increase in net sales (10.0% organic), segment profit fell over 20% to $19.8 million. The segment margin contracted by 290 basis points to just 9.3%. Management cited 'category and regulatory headwinds in Mexico' as a key issue, indicating persistent operational challenges in key overseas markets.
Innovation Pipeline Remains a Priority
Management continues to lean on innovation to drive consumer engagement and support pricing. Key upcoming events include the Hershey movie partnership and activations around the Olympics. The call also highlighted new product development in multipacks and leveraging sweet and salty combinations, like Reese's peanut butter filled pretzels, to capture consumer interest.
Other KPIs
Stable. While profit grew 8.5% YoY, this was on the back of a massive 32.0% sales increase. This resulted in segment margin compression of 520 basis points to 24.2%. It demonstrates that even a significant volume recovery was not enough to offset the severe inflation in commodity and manufacturing costs during the quarter.
Inventories increased significantly from $1.25 billion at the end of FY24. This reflects the reversal of the planned inventory reductions that took place in the prior year's second quarter ahead of the ERP system implementation, and is not a sign of slowing demand.
Up sharply from 24.4% in the prior-year quarter. The company updated its full-year adjusted tax rate outlook to ~24% from ~16% previously. This is a significant headwind driven by global business strategy changes and lower availability of tax credits, which management expects to persist into 2026.
Guidance
Stable. This outlook was reaffirmed. Given that H1 2025 sales growth was 1.7%, this implies a slight acceleration in the second half of the year to meet the target.
Decelerating. This is a significant negative revision from the prior guidance of 'down mid-30% range.' The change is almost entirely due to the newly incorporated $170-$180 million tariff expense. This implies a very difficult second half for profitability.
Negative. This is a new, material headwind that was not fully contemplated in prior guidance. Management noted they are optimistic about a potential exemption for cocoa, but for now, this full impact is baked into the earnings forecast.
Key Questions
Quantifying the 2026 Recovery Path
Your pricing actions are expected to drive over 500 basis points of gross margin recovery in 2026. To achieve your 'on-algorithm' EPS growth target, what assumptions are you making for cocoa prices and potential tariff relief? What is the earnings outlook if cocoa remains elevated and no tariff relief is granted?
Tariff Mitigation Contingency
While you are optimistic about a cocoa tariff exemption, what is the contingency plan if this does not materialize? Are you exploring supply chain shifts, or would you need to implement another round of pricing specifically to offset tariffs?
Elasticity Confidence
Given the magnitude of the 2026 price increase, what gives you confidence that historical elasticity models will hold in an environment where consumer wallets are still pressured, and how will you monitor and react if volume declines are steeper than anticipated?
International Margin Path
The International segment's margin fell to 9.3% despite strong organic sales growth. Beyond the mentioned headwinds in Mexico, what are the primary drivers of this margin compression, and what is the strategic plan to restore profitability to the mid-teens level?