HSY Q3 Deep Dive: Margin Pressure Emerges as Category Growth and Innovation Drive Results

Chocolate company Hershey (NYSE:HSY) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 6.5% year on year to $3.18 billion. Its non-GAAP profit of $1.30 per share was 22.2% above analysts’ consensus estimates.

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StockStory’s Take

Hershey’s latest quarter saw revenue and non-GAAP profit surpass Wall Street’s expectations, yet the market responded negatively amid concerns over falling operating margins. Management attributed top-line momentum to balanced growth across both core and new product lines, with CEO Kirk Tanner highlighting double-digit increases in everyday chocolate, mint, and gum (CMG) and strong performance in the salty snacks segment. Despite this, leadership acknowledged challenges in the seasonal business—especially Halloween—due to timing, weather, and shifting consumer behavior. CFO Steven Voskuil addressed the margin compression, noting that higher cocoa prices and increased brand investments weighed on profitability, even as recent innovation, such as the REESE'S Oreo launch, contributed meaningfully to growth.

Looking forward, Hershey’s guidance reflects a focus on balancing growth with margin recovery in an uncertain cost environment. Management signaled plans to invest in both core and innovative products, while closely monitoring elasticity as pricing actions flow through. CEO Kirk Tanner emphasized, "We’re going to invest in our business and in our brands, while we build back margin and compete at the category level." The company remains watchful of key variables like cocoa costs, tariffs, and consumer resilience, and expects progress on margin restoration to be gradual rather than immediate. The innovation pipeline—including further extensions of REESE'S Oreo and developments in the salty snacks portfolio—will be central to sustaining growth.

Key Insights from Management’s Remarks

Hershey’s management cited robust performance in both core and innovative products, while acknowledging margin pressures and evolving consumer demand patterns.

• Everyday CMG momentum: Everyday chocolate, mint, and gum products posted double-digit growth in the last month, offsetting slower seasonal sales and demonstrating resilience in core demand.
• Salty snacks outperformance: The salty snacks segment, particularly SkinnyPop and Dot’s, delivered notable volume growth and share gains, attributed to product refreshes and a focus on permissible snacking trends.
• Seasonal sales challenges: Halloween sales started slow, with management citing the holiday’s timing and warm weather, but also highlighted targeted opportunities to improve pack types and marketing strategies in future seasons.
• Innovation pipeline strength: The REESE’S Oreo launch was a top driver of category growth, and management indicated a robust pipeline of innovation through 2026 and 2027, aiming to balance new product excitement with support for core brands.
• Brand investment and competitive environment: Increased digital marketing and brand investment were deployed to support both innovation and core offerings, as management underscored the need for efficiency and adaptability amid a rational but competitive pricing landscape.

Drivers of Future Performance

Management expects future performance to hinge on the interplay between pricing actions, cost inflation, ongoing innovation, and consumer demand resilience.

• Elasticity and pricing impacts: The company plans for moderate volume declines as price increases work through the market, with management viewing elasticity—consumer sensitivity to price changes—as a key variable that could swing results either way.
• Cocoa and tariff fluctuations: Leadership is cautiously optimistic that cocoa cost inflation may moderate, and is watching for possible tariff relief, both of which would influence gross margin trends and the pace of margin recovery.
• Innovation and brand investment: Investment in new products, such as further REESE’S Oreo extensions and salty snack innovations, will continue, with management balancing these efforts against the need to rebuild margins and meet long-term growth targets.

Catalysts in Upcoming Quarters

In the quarters ahead, key developments to watch will be (1) the pace of margin recovery as cocoa costs and tariff impacts evolve, (2) consumer response to further price increases and new product launches, and (3) continued growth and profitability in the salty snacks portfolio. Execution in the convenience channel and seasonal sales recovery will also be important markers of progress.

Hershey currently trades at $167.76, down from $175.48 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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