The Hershey Company Third Quarter 2026 Earnings Q&A Session - HERSHEY CO

Financial Performance:

• Maintains Q2 2027 organic sales growth outlook of 2% to 4%, contingent on consumer behavior and macro factors; EPS growth guidance for 2027 remains targeted at double digits, though current conditions could result in landing at the lower end of the original range.
• Projected Q4 2026 gross margin exit rate is approximately 39%, heavily influenced by cocoa hedge timing; long-term target remains a mid-40% margin recovery by 2028.
• Q3 revenue performance was impacted by tough year-over-year comparisons for Reese Oreo and softness in convenience store channels; however, profitable share performance has accelerated in July and August.
• Volume trends are showing signs of improvement, with unit declines moderating from double-digits to mid-single digits as net price realization has moderated and brand investments are ramping up.
• Full-year brand investment is expected to remain around 10% of sales, with ROI improving approximately 8% due to more dynamic, real-time market mix modeling.

Guidance and Future Outlook:

• 2027 innovation pipeline is 50% larger than 2026, with a significant portion of major innovations scheduled for Q1 to counteract the early-year headwinds from a shorter Easter.
• Management remains confident in reaching the 2%-4% sales growth range, though acknowledges that persistent consumer pressure (gas prices, inflation) could push results to the lower end.
• Q4 outlook is impacted by tough lapping of Reese Oreo and continued convenience store softness; however, volume is expected to improve sequentially as price growth moderates and promotional activity ramps up.
• Margins for 2027 are expected to see meaningful improvement over 2026, driven by the rolling through of cocoa hedges, productivity initiatives, and logistics optimization, though freight and logistics costs remain a near-term headwind.
• The company expects to return to double-digit EPS growth in 2028, provided the cost environment improves and consumer demand stabilizes.

Business Segments and Product Lines:

• Confectionery: Hershey brand grew 7% in the last 13 weeks; major Q4 launches include Hershey Creme Bar, Hershey Rolls, KitKat seasonal shaves, and Reese's Cocoa Filled Pretzels.
• Salty Business: Experiencing supply constraints that are pulling growth down, but management is confident in meeting demand in 2027 with new manufacturing lines and automation investments coming online in H1 2027; service levels are improving.
• Innovation: The 2026 portfolio features strong performers like Reese's Filled Pretzels and Dot Snack Mix; 2027 pipeline focuses on premium, suites, functional, and "better-for-you" categories.
• Distribution: Actively expanding "away from home" channels (specialty retail) for both confectionery and salty segments; also exploring "agentic commerce" partnerships with major retailers like Amazon, Walmart, and Target.
• Marketing: Executing new campaigns for Cadbury, Fun Size, and Payday; leveraging the upcoming "The Hershey Movie" release (pre-Thanksgiving) to drive in-store merchandising and brand visibility.

Market and Competitive Landscape:

• The broader confectionery category is viewed as resilient and healthy outside of the convenience store channel, which saw a 5% decline in September and continuing weakness into October.
• Competition has intensified with increased short-term promotional activity and innovation from rivals; Hershey argues that its strategy of "profitable share" and robust innovation pipeline will drive long-term share gains.
• Consumer behavior is shifting toward mass and e-commerce channels due to inflationary pressure, while convenience stores suffer from high gas prices reducing trip frequency.
• Cocoa market outlook: Global supply is expected to improve with increased acreage in new origins (e.g., Ecuador) and healthier inventories following a historical surplus; supply issues in the salty sector (SACS) are expected to resolve in 2027.

Risks and Challenges:

• Macro headwinds: Elevated gas prices and cost inflation are pressuring consumer spending, particularly in the convenience store channel.
• Operational constraints: Current supply limitations in the salty business are affecting growth potential, though capacity expansion is underway.
  Cost environment: Persistent freight, logistics, and non-cocoa input cost inflation could delay margin recovery timelines.
• Seasonality: The timing of Halloween (Saturday) and Easter (shorter calendar) creates volatility and difficult year-over-year comparisons.
• Market share loss: Despite high activity, the company acknowledges recent market share loss, attributed to competitor aggressive short-term tactics, but believes this will reverse with the 2027 innovation push.

Management Commentary and Tone:

• Tone is confident yet cautious; management emphasizes control over "what they can control" (innovation, media, programming) while acknowledging the impact of external macro factors.
• Leadership expresses strong belief in the 2027 innovation pipeline and the efficiency of their marketing spend (8% ROI improvement).
• Executives defend pricing strategy as rational, noting that category growth is driven by innovation rather than promotions, and they are focusing on "price-pack" architecture and targeted value rather than across-the-board price cuts.
• There is a clear strategic pivot toward agility, using data to direct investments and a focus on "profitable share" over pure volume growth.

Analyst Questions and Answers:

• Visibility on 2027: Analysts questioned how visibility exists given the macro backdrop; Management cited strong brand momentum, a 50% larger innovation pipeline, and improved programming returns as key drivers.
• Market Share Loss: Addressed the "losing share" narrative by attributing it to competitor short-term activity and tough comps in September/October, predicting a rebound as 2027 innovations launch.
• Pricing vs. Value: Discussed whether price gaps are too wide; Management stated pricing is rational and they are addressing value through pack architecture and targeted promotions rather than price reductions.
• Q4 and Q1 2027 Outlook: Clarified that Q4 will remain challenging due to comps, with the "true" growth ramp beginning in Q1 2027 due to a heavy innovation calendar; Q1 is a strong start despite the shorter Easter.
• Cocoa & Salty Supply: Provided updates that cocoa supply is diversifying and prices may correct, while salty supply constraints are being solved through automation and new lines coming online in H1 2027.
• Margins: Explained that the Q4 margin dip is hedge-specific and that 2027 will see a step-up as hedges roll through and productivity gains materialize.

Other Key Points:

• Hershey is leveraging "Decision Intelligence" and factory digitization to drive manufacturing efficiencies and reduce waste.
• The "S'mores" and "Back to School" programming events are delivering double-digit growth, signaling strong execution on marketing.
• Management reiterated that the 2027 EPS framework excludes the one-time 2026 tariff refund, meaning double-digit growth must be achieved from the adjusted base.
• The company is maintaining a disciplined hedging approach for cocoa while utilizing flexible instruments to capture favorable market moves.
• The "The Hershey Movie" is expected to be a significant merchandising tailwind for the core Hershey brand in Q4 and into 2027.