Hershey margin recovery expected to begin in Q2, but Jefferies stays on sidelines over volume concerns

Hershey Company (NYSE:HSY, XETRA:HSY) is expected to begin recovering margins in the second quarter as higher-cost cocoa inventory from last year cycles through, but Jefferies maintained a ‘Hold’ rating, citing continued weakness in consumer demand and limited evidence of a recovery in sales volumes.

Jefferies wrote that the second quarter "should be the first with meaningful year-over-year gross margin expansion," forecasting roughly 300 basis points of improvement as peak-cost inventory laps.

While cocoa prices have risen from February lows in recent weeks, the firm noted they remain well below year-ago levels and are unlikely to disrupt the near-term margin outlook because much of the company's cocoa exposure is hedged.

The firm expects shipment timing to weigh on reported results after around two percentage points of sales were pulled forward into the first quarter. As a result, it forecasts a modest decline in second-quarter organic sales despite continued pricing strength.

Jefferies expects pricing to contribute around 11 percentage points of growth in the quarter, more than offset by lower volumes. It forecasts Hershey's volumes to decline about 12% in the second quarter, noting that U.S. tracked chocolate dollar sales fell roughly 4% over the latest 12 weeks while chocolate volumes dropped nearly 19% amid continued consumer sensitivity to higher prices.

The analysts noted that competitor Mars has posted volume gains in four of the past six months, while Hershey plans to respond with increased product innovation. The company's salty snacks business, including LesserEvil and Dot's, is also expected to provide some support.

Looking to the second half of the year, Jefferies expects new marketing campaigns and product launches to support performance, including the America 250 program, a Thanksgiving film promotion, and new Reese's products. However, the firm wrote that it views 2027 as "a measured recovery rather than a snapback."

Jefferies slightly lowered its second-quarter revenue estimate to reflect softer tracked demand while leaving its full-year earnings forecast unchanged.

The firm increased its price target to $190, implying upside from current levels of $175, stating that it remains cautious "given the unresolved volume question and a valuation that already reflects the improved cost backdrop."