Hershey Co. outlook revised to negative at S&P due to high leverage

S&P Global Ratings revised Hershey's outlook to negative from stable, affirming its 'A' issuer credit rating, citing rising leverage expected to reach the mid-2x area by fiscal year-end 2025 due to high cocoa costs and the $750 million LesserEvil acquisition. The negative outlook reflects the risk of a downgrade if Hershey fails to reduce leverage to the low-2x area within 24 months, with potential headwinds from sustained high cocoa prices (currently above $11,000 per ton), potential tariffs, and a weakening macroeconomic environment limiting pricing power, despite cost-saving initiatives.

Analysis

S&P Global Ratings has revised its outlook on The Hershey Co. (HSY) to negative from stable, reflecting concerns over increasing leverage and weakening profitability stemming from high cocoa costs and ongoing acquisitions. While Hershey's 'A' issuer credit rating and 'A-1' short-term and commercial paper ratings were affirmed, its leverage is anticipated to rise to the mid-2x area by fiscal year-end 2025, a notable increase from 1.8x as of March 31, 2025, partially driven by the recent $750 million agreement to acquire LesserEvil. Persistently high cocoa prices, which surged above $11,000 per ton in May 2025 after peaking over $12,000 per ton in 2024, are projected to compress S&P Global Ratings-adjusted EBITDA margins by over 700 basis points in fiscal 2025. Hershey is attempting to mitigate these pressures through strategies including hedging, productivity savings from its AAA initiative (targeting $125 million in 2025), pricing adjustments, and innovation. However, the negative outlook underscores the risk of a potential ratings downgrade if Hershey fails to restore leverage to the low-2x area within the next 24 months. This deleveraging effort faces headwinds from potential unmitigated tariffs amounting to $100 million per quarter in the latter half of 2025 and a weakening macroeconomic environment that could constrain the company's ability to implement further price increases.

Key Decisions for Investors

• Investors should closely monitor Hershey's leverage ratios relative to the S&P Global Ratings' target of the low-2x area over the next 24 months, as failure to meet this could precipitate a credit rating downgrade.
• Evaluate the ongoing impact of volatile cocoa prices on Hershey's EBITDA margins and assess the effectiveness of its mitigation strategies, particularly its pricing power in a potentially weakening macroeconomic climate and the realization of targeted cost savings.
• Consider the execution risks and financial impact of Hershey's acquisition strategy, including the integration of LesserEvil, and monitor developments regarding potential U.S. tariffs on cocoa, which could further pressure profitability.