HERSHEY CO Q3 FY2026 earnings call

• Financial Strength: Management narrowed full-year net sales and adjusted EPS ranges to the top half of prior outlooks, citing strong H1 performance with reported net sales up nearly 9% and adjusted EPS up 28%. Adjusted EPS for Q2 grew 57% year-over-year to $1.90, driven by pricing, productivity, and input cost deflation.

• Strategic Investments: Hershey plans a 30% year-over-year increase in brand investment for 2026 and 2027 to support growth. Innovation pipelines are accelerating, with large national launches such as Hershey's Creme Filled Bars and Reese's Pieces with Cookie expected to drive incrementality starting in 2027.

• Supply Chain & Operations: Despite Q2 supply constraints in salty snacks, management is deploying capital for automation and capacity expansion. The company is advancing a tech-enabled supply chain to improve efficiency and agility, while strengthening customer programming to capture demand.

• Consumer Trends: Consumer sentiment remains soft and value-oriented, but SNAP program impacts were modest. GLP-1 adoption and health/wellness trends are tracking in line with expectations, with portfolio strength in permissible snacking (gum, mints, protein) supporting momentum.

• Capital Allocation: The Board approved an incremental $500 million share repurchase authorization in June 2026, bringing total remaining authorization to $270 million under the previous plan plus the new amount. Dividends paid increased 6% year-over-year to $286 million.

North America Confectionery: Reported net sales grew 6% in the first half (driven by ~5% marketplace demand and retailer replenishment). Second quarter reported net sales increased 4.2%, with net price realization of approximately 14% offsetting an 8-point volume decline due to elasticity and shipment timing. The segment benefits from strong brand relevance and improved core item availability.

North America Salty Snacks: Reported net sales surged 24% in the first half, though organic net sales rose only 3% due to supply challenges with multipacks and Dots pretzels in Q2. In Q2, reported net sales increased 22.9%, including a ~22-point benefit from the Lesser Evil acquisition. Organic constant-currency volume grew ~4%, but net price realization declined 3% due to higher trade investment. Full-year organic net sales guidance is updated to 3-4% growth.

International: First-half net sales increased 11% with nearly 6% organic growth, led by Brazil and the UK. In Q2, net sales rose 5.7%, supported by a ~4-point foreign currency tailwind and ~10% net price realization, despite an 8-point volume decline driven by elasticity and inventory shifts. Full-year international organic net sales outlook was revised upward from a low single-digit decline to modest growth.

• Net Sales Growth: Updated full-year organic net sales growth expectation to 3% to 3.5%, reflecting strong H1 performance and confidence in H2 execution.

• Adjusted EPS Growth: Revised full-year adjusted EPS growth range to the upper half of the prior outlook, now expecting 32.5% to 35% growth. Q3 EPS growth is expected to be the strongest of the year due to favorable pricing versus commodity costs.

• North America Salty Snacks: Updated full-year organic net sales growth expectation to 3% to 4%, down from prior expectations due to Q2 supply constraints, though demand remains strong.

• International: Revised full-year international organic net sales outlook from a low single-digit decline to modest positive growth, improving on prior expectations.

• Gross Margin: Full-year gross margin expansion is expected to be slightly below 400 basis points, impacted by increased freight and logistics costs in the salty snacks segment, though Q2 results were ahead of expectations.

• Supply Chain Constraints: Significant supply challenges in Q2 affected multipacks and Dots pretzels in the salty snacks segment, tempering organic growth and requiring capital deployment for capacity fixes.

• Consumer Elasticity: Volume declines in North America confectionery and international segments highlight ongoing consumer sensitivity to price, with elasticity impacting volume despite strong price realization.

• Geopolitical and Inventory Risks: International volume was negatively impacted by the depletion of roughly $10 million in inventory shift in Q1, undertaken to mitigate geopolitical risk.

• Evolving Market Conditions: Soft U.S. consumer sentiment and selective spending behaviors pose risks, although current impacts are viewed as moderate. Seasonal variations and evolving health trends (e.g., GLP-1s) require continuous monitoring.

• Cost Pressures: While input cost deflation aided margins, unfavorable freight and logistics costs in salty snacks and international segments partially offset gains, impacting full-year margin expansion targets.

Q: How does the management view the impact of GLP-1 drugs on long-term demand, and what specific product adjustments are being made?

A: Management stated that GLP-1 adoption is tracking in line with expectations and is not causing significant disruption to core volumes. They emphasized that their portfolio is well-positioned across occasions, particularly in permissible snacking like gum, mints, and protein bars, which offer functional benefits. The strategy focuses on innovation and brand building to maintain relevance rather than reacting defensively to health trends.

Q: What are the key drivers behind the strong adjusted EPS growth in Q2, and how sustainable is this margin expansion?

A: Q2 adjusted EPS growth of 57% was driven by strong net price realization (~12%), productivity initiatives, and input cost deflation. Management highlighted that tariff refunds ($9 million) and favorable product mix also contributed. However, full-year gross margin expansion is expected to be slightly below 400 basis points due to rising freight costs, indicating that while pricing power is strong, operational costs remain a variable.

Q: Can you elaborate on the 'Lesser Evil' acquisition and its contribution to salty snacks growth?

A: The Lesser Evil acquisition provided a significant boost, contributing approximately 22 points to Q2 net sales growth in the salty snacks segment. Excluding this acquisition, retail consumption still rose 6.5%, driven by brands like Dots and Reese's filled pretzels. This indicates that underlying organic demand is robust, even without M&A contributions, supporting the updated full-year organic growth guidance of 3-4%.

Q: How is Hershey addressing the tension between consumer value-seeking behavior and the need for price increases?

A: Management noted that consumers remain value-oriented, leading to volume declines despite high net price realization (~14% in NA Confectionery). To balance this, they are focusing on 'price pack architecture' actions and strategic merchandising to maintain elasticity. The company believes its brand strength allows it to navigate disciplined spending while continuing to invest heavily in marketing and innovation to drive demand creation.