Hershey outlook changed to negative amid cocoa price challenges

Moody’s Ratings affirmed The Hershey Company’s A1 senior unsecured rating but revised its outlook to negative from stable, citing significant earnings pressure from persistently high cocoa prices and substantial tariff impacts. The rating agency projects a 25-30% decline in Hershey's 2025 EBITDA and an increase in gross debt-to-EBITDA leverage to nearly 3x by year-end, driven by cocoa hedging costs and up to $100 million in quarterly tariff impacts. While the affirmation reflects Hershey's strong market position and pricing power, the negative outlook signals material profitability challenges and reduced free cash flow, prompting the company to prioritize debt reduction over share repurchases and focus on pricing and operational efficiencies to mitigate headwinds.

Analysis

Moody's has revised The Hershey Company's (HSY) outlook to negative from stable while affirming its A1 senior unsecured rating, signaling significant near-term financial pressure. The primary drivers are twofold: soaring cocoa prices, which have more than doubled in 2024, and the potential for up to $100 million in quarterly tariff impacts in the latter half of the year. This is projected to cause a severe contraction in profitability, with Moody's forecasting a 25-30% decline in EBITDA for 2025. Consequently, gross debt-to-EBITDA leverage is expected to increase from 2.4x to nearly 3x by year-end 2025. In response, Hershey is suspending share repurchases to preserve capital and prioritize balance sheet health, focusing on mitigation through pricing actions and operational efficiencies. The company's liquidity remains strong with $1.5 billion in cash and a $1.35 billion undrawn credit facility, though $750 million of this cash is earmarked for the LesserEvil acquisition. However, projected free cash flow after dividends is expected to be minimal at $50-$100 million in 2025, a stark reduction from prior years. The rating affirmation acknowledges Hershey's strong market position and pricing power, but the negative outlook is compounded by structural risks, including high geographic concentration with 92% of sales in North America and significant exposure to consumer health trends like GLP-1 drugs.

Key Decisions for Investors

• Investors should monitor Hershey's execution on price increases and cost efficiencies, as these are critical to offsetting the severe margin compression from cocoa and tariffs projected to reduce 2025 EBITDA by 25-30%.
• Given the suspension of buybacks and leverage projected to approach 3x, scrutinize the company's progress on debt reduction and the cash flow integration of the $750 million LesserEvil acquisition.
• Consider the negative outlook and earnings weakness as a potential headwind for the stock in the medium term, weighing any valuation opportunities against the structural risks of commodity volatility and long-term consumer health trends.
• Pay close attention to management's commentary on the stabilization of input costs and any success in securing tariff exemptions, as these will be key catalysts for a potential outlook revision and improvement in credit metrics in 2026.