Q3 2024 Earnings Summary
- Hershey is enhancing execution by implementing the "gold standard shelf" for instant consumables, anticipated to lead to stellar results.
- The company is focusing on growth opportunities in underdeveloped areas like sweets, with strong innovation and distribution expansion, expecting these areas to drive significant growth in 2025 and beyond.
- Hershey is seeing positive market share trends due to successful innovations and strong performances in key categories like sweets and SkinnyPop, expecting gradual improvement and share gains.
- Increased competition from private label and smaller manufacturers is impacting Hershey's market share in the confectionery segment, particularly in take-home products. Michele Buck acknowledged that "there are some smaller players who came in and have competitive velocities, and we need to switch out some of the items we have for even stronger items."
- Hershey's gross margin for the quarter was below expectations due to sales flow-through issues, negative mix, and volume deleverage. Steven Voskuil stated that "it was below what we were expecting... The biggest piece was the sales flow through and... the mix of sales... there was some negative mix inside the sales delivery that had an impact on gross margin... we also had some volume deleverage..."
- The impact of GLP-1 weight loss drugs is leading to a decline in consumption in their categories, with consumers on these drugs eating disproportionately less of confectionery products. Michele Buck noted that "we're seeing a mild year-on-year impact... we've continued to see multiple sources of data validating that the consumers on those drugs are eating disproportionately less of our categories."
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Gross Margin YoY Decline | Q3 2024 | Decline of ~200 basis points | Declined by ~360 basis points, from ~44.9% () in Q3 2023 to ~41.3% () in Q3 2024 | Missed |
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Cocoa Cost Impact
Q: How will cocoa inflation affect 2025 earnings?
A: Cocoa prices are significantly increasing for next year, leading to a substantial inflationary headwind in 2025. This year's cocoa costs were hedged and set earlier, but next year's prices reflect current higher market rates. The impact will be significant, but exact figures aren't provided yet. -
2025 Earnings Outlook
Q: Are you expecting a double-digit earnings decrease in 2025?
A: While acknowledging significant pressures from cocoa inflation, tax normalization, and incentive compensation adjustments, management cannot provide precise guidance yet due to evolving cocoa prices. -
Pricing Strategy
Q: Will pricing increase more in 2025 compared to 2024?
A: Pricing next year is expected to be similar to this year, as price increases will flow through. They've taken pricing on about half of their chocolate volume, netting to a low to mid-single-digit pricing increase overall. -
Market Share Trends
Q: When will chocolate market share stabilize?
A: Expecting gradual improvement, with momentum building through the end of this year and into next. Most of the portfolio should recover, but instant consumables may remain under pressure until mid-2025 due to convenience store channel pressures. -
GLP-1 Drug Impact
Q: Are GLP-1 drugs affecting chocolate sales?
A: Experiencing a mild year-on-year impact, as consumers on these drugs consume less from their categories. The effect is gradual and in line with expectations. The company is monitoring behavior and evolving the portfolio to meet consumer needs. -
Gross Margin Performance
Q: What caused the gross margin shortfall?
A: Gross margins were below expectations due to lower sales, negative mix—particularly in convenience stores—and volume deleverage. These factors collectively drove the disappointing margin performance. -
Increased Competition
Q: What's causing increased competition internationally?
A: Facing intensified pricing competition in international markets, especially in Mexico and Brazil, where competitors are deeply discounting. These are smaller markets where Hershey is a smaller player, but competition has been intense. -
Marketing Spending
Q: Will marketing spend decrease due to cost pressures?
A: No, Hershey believes in investing in their brands and plans to maintain or increase marketing spend, focusing on high ROI and efficiency. They are strategically investing to bolster the instant consumable business and leveraging media to drive top-line growth. -
Inventory Impacts
Q: How are inventory moves affecting guidance?
A: Inventory movements are causing about a 0.5-point drag on full-year guidance. Expecting mid-single-digit shipping timing impacts in Q4. These inventory effects will be less significant in 2025. -
Leadership Changes
Q: What will the new head of North America Confectionery bring?
A: Mike, coming from PepsiCo, brings external perspective and strong customer and retail experience. He will enhance customer focus to unlock growth and evolve the portfolio to meet shifting consumer channels. -
Future Growth Drivers
Q: Which areas will drive growth in 2025 and beyond?
A: Growth will come from salty snacks (SALT), sweets, and seasonal products, where there's strong category growth and household penetration opportunity. Channel opportunities, especially in chocolate, will also contribute, but the biggest inflection point may come from other areas.