Hershey (HSY) Q1 2025: Tariff Exposure Flags $100M Quarterly Headwind, Forcing Broad Mitigation Playbook
Hershey’s Q1 call put a spotlight on tariff risk, with management quantifying up to $100 million in unmitigated quarterly exposure for the back half, driving a clear pivot to aggressive mitigation levers including pricing, sourcing, and product mix. While core chocolate and sweets categories remain resilient, the company’s margin structure faces acute pressure from cocoa inflation and tariffs, with management signaling a narrower but still viable path to earnings growth in 2026. Investors should brace for further volatility as regulatory, commodity, and competitive dynamics converge, with Hershey’s agility in execution now the key variable for the year ahead.
Summary
- Tariff Exposure: Unmitigated tariff risk could reach $100 million per quarter in Q3 and Q4, prompting broad mitigation efforts.
- Margin Compression: Gross margin faces a 700 basis point decline in Q2, reflecting cocoa inflation and higher SG&A as marketing normalizes.
- Mitigation Levers Activated: Management is deploying price pack architecture, sourcing shifts, and innovation to defend profit and share.
Performance Analysis
Hershey’s Q1 performance underscored resilience in its core chocolate and sweets businesses, but the quarter was defined by sharp margin compression and outsized external cost headwinds. The company’s guidance for Q2 and the full year signaled continued gross margin pressure, driven by the dual impact of high cocoa costs and newly quantified tariff exposure. While net sales are expected to benefit from a late Easter and favorable seasonal dynamics, the earnings outlook remains under pressure, with first-half EPS projected down about 30 percent and back-half EPS implied down around 40 percent. SG&A, or selling, general and administrative expenses, will rise sharply in Q2 as marketing spend normalizes post-ERP stabilization.
Category performance remained a bright spot, with chocolate and sweets showing robust demand elasticity and share gains, especially in the seasons and sweets segments. Everyday chocolate is expected to return to low single-digit growth in the second half, supported by incremental shelf placements and a major Reese’s innovation slated for fall. Internationally, Hershey outperformed expectations, particularly in Brazil and India, with share gains and strong organic sales growth. However, the company’s exposure to tariffs and commodity volatility now overshadows these operational wins, as management prepares to activate a full suite of mitigation strategies to protect earnings power.
- Tariff Impact Quantified: CFO Steve Boskell revealed unmitigated tariff exposure could reach $100 million per quarter in Q3 and Q4, primarily from cocoa and Canadian retaliatory tariffs.
- Gross Margin Headwinds: Q2 gross margin is expected to decline 700 basis points, with further pressure from higher marketing spend and commodity costs.
- Category Resilience: Sweets and chocolate held share, with everyday chocolate expected to improve and sweets positioned for sustained long-term growth.
Despite strong underlying demand and innovation momentum, Hershey’s financial narrative is now dominated by its ability to offset external cost shocks, with the success of mitigation levers determining earnings trajectory.
Executive Commentary
"For Q2, I think we have enough clarity to share that 15 to 20, as you'd expect. We've got a lot of inventories, so that mitigates some of the impact for Q2. As we look to the back half, as you said, I'll start by saying it changes constantly...the unmitigated impact could be up to $100 million per quarter, for quarter three and quarter four. If you break that down, two-thirds of it are either COCO or the Canadian retaliatory tariffs. And those are the two areas where, as you can imagine, we've got the most effort focused on influencing government action, using every lever at our disposal to get those tariffs changed, particularly with respect to COCO."
Steve Boskell, Senior Vice President and Chief Financial Officer
"We are consistently innovating and investing in our iconic brands specifically to give consumers what they're asking for. And sometimes they know what they want. Other times we're trying to provide them things that we think they will want, but this innovation is something that they've been asking for for quite a long time. So, and based on all of our early planning around that, all of the research that we've done gives us a pretty good feel for size of innovation...stay tuned it will be hitting in the fall and we're really anxious for all about it and try it."
Michelle Buck, Chairman and Chief Executive Officer
Strategic Positioning
1. Tariff and Commodity Cost Mitigation
Hershey’s strategic focus has shifted to a multi-pronged mitigation playbook to defend margins and earnings against rising tariffs and cocoa inflation. Management is leveraging government lobbying, productivity initiatives, pricing actions, and sourcing shifts. The CFO confirmed all mitigation levers are on the table, including price pack architecture, demand shaping, and manufacturing changes. The company expects to update investors on the effectiveness of these actions around mid-year, as visibility improves and potential legislative relief is pursued.
2. Innovation and Brand Investment
Innovation remains central to Hershey’s growth thesis, with a major Reese’s launch planned for fall and continued expansion in sweets and salty snacks. Management highlighted robust innovation pipelines and incremental shelf placements, particularly in instant consumables and c-store channels. The company’s agility in product development, supported by recent capacity investments and vertical integration, is expected to drive share gains and defend core categories.
3. Diversification and Category Expansion
Hershey continues to execute on its snacking powerhouse vision, expanding into white space categories such as sweets, salty snacks, and better-for-you platforms. The recent Lesser Evil acquisition, a better-for-you snack brand, extends reach into younger, more diverse demographics and enhances the company’s margin mix. Management sees long-term potential in sweets and salty snacks, leveraging innovation and brand-building to offset chocolate category cyclicality and cocoa exposure.
4. Capital Allocation and Buyback Pause
Capital allocation remains disciplined, with a temporary pause on share repurchases in 2025 as tariff and cost headwinds take priority. Management reiterated that buybacks remain a core part of long-term capital strategy, but near-term focus is on M&A and internal investment. Should cost pressures abate, the company expects to revisit share repurchases and further invest behind brands and innovation.
Key Considerations
This quarter’s call marked a clear inflection point for Hershey, as external cost shocks forced a pivot from steady margin expansion to active risk management and mitigation. The company’s ability to execute on pricing, innovation, and cost containment will define its near-term earnings power.
Key Considerations:
- Mitigation Execution: Success in offsetting up to $200 million in H2 tariff exposure will hinge on pricing, sourcing, and lobbying effectiveness.
- Category Elasticity: Chocolate and sweets have shown resilient elasticity, but further price increases could test consumer demand, especially in a value-seeking environment.
- Innovation-Driven Share Gains: Major launches, particularly in Reese’s and sweets, are critical to driving incremental trips and defending shelf space in the back half.
- Salty and Better-for-You Expansion: Growth in salty snacks and better-for-you platforms offers incremental margin and consumer diversification, but scale remains a work in progress.
- Capital Allocation Flexibility: Pause in buybacks signals near-term caution, but underlying cash generation and M&A appetite remain intact for future deployment.
Risks
Hershey faces heightened risk from tariff volatility, cocoa price swings, and regulatory changes affecting SNAP and food additives. While management is proactively mitigating, the size and timing of external shocks could outpace internal levers, compressing margins and earnings. Competitive intensity, especially from private label and new entrants, remains a persistent threat in both chocolate and snacking categories.
Forward Outlook
For Q2, Hershey guided to:
- EPS decline less than Q1, with gross margin down 700 basis points and higher SG&A from normalized marketing spend.
- Net sales strength from late Easter and innovation, but offset by cost headwinds.
For full-year 2025, management maintained guidance of mid-30s percent EPS decline, with back half EPS implied down about 40 percent. Key factors influencing the outlook include:
- Magnitude and timing of tariff mitigation and government relief efforts.
- Effectiveness of pricing, sourcing, and innovation levers in offsetting cost pressure.
Takeaways
Investors should focus on Hershey’s execution on cost mitigation, pricing power, and innovation as the decisive drivers for 2025 and 2026 earnings trajectory.
- Tariff Shock as Central Risk: Up to $200 million in H2 exposure has forced a company-wide pivot to mitigation, with all levers in play and outcomes uncertain.
- Core Demand Still Intact: Chocolate and sweets categories show resilient demand and share gains, but further price increases could test elasticity.
- Innovation and Diversity as Offsets: Major launches and expansion in salty and better-for-you snacks are critical to offsetting chocolate cyclicality and cost volatility.
Conclusion
Hershey enters a period of heightened volatility, with cost shocks and regulatory risk forcing a strategic reset. The company’s ability to execute on mitigation, defend core demand, and accelerate innovation will determine its earnings path and market standing through 2025 and beyond.
Industry Read-Through
Hershey’s acute exposure to tariffs and cocoa inflation is a warning signal for the broader confectionery and snacking industries. Companies with concentrated commodity exposure, limited pricing flexibility, or lagging innovation pipelines could face similar margin compression and earnings volatility. The shift toward multi-lever mitigation—pricing, sourcing, innovation, and lobbying—will likely become standard playbook for CPG peers facing regulatory and cost shocks. Retailers and suppliers should expect continued focus on value, pack architecture, and shelf productivity, while M&A may accelerate as large players seek to diversify risk and expand into less commodity-sensitive categories.