Jim Cramer takes a bite out of Hershey's chart

Key Concepts

• Hershey Stock Performance: Significant decline from highs, driven by various factors.
• GLP-1 Drugs (Weight Loss Drugs): Impact on the packaged food industry, reducing consumption of larger portioned items.
• Cocoa Prices: Volatility and high costs impacting Hershey's margins.
• New CEO Kirk Tanner: Hired in mid-August, with previous experience at Wendy's and PepsiCo.
• Q3 Earnings Report: Mixed results with strong net sales and organic growth, but declining gross margins and earnings per share.
• Full Year Guidance: Modest increase, perceived as a disappointment by the market.
• Management Caution: Deliberate conservative forecasting by the new leadership.
• Analyst Upgrades: Piper Sandler upgraded Hershey from underweight to neutral.
• Target Stock: Discussed in the context of its current performance and potential for recovery.
• Costco Stock: Highlighted as a strong buy in the retail sector, despite a high P/E ratio.
• Columbia Sportswear: Mentioned as a potential buying opportunity after earnings decline.
• Meta Earnings: Briefly touched upon with a promise of an alternative perspective.

Hershey's Stock Plunge and Q3 Earnings Analysis

The stock of Hershey has experienced a significant downturn, falling from a high of $196 to $169. This decline is attributed to several factors impacting the packaged food industry, most notably the widespread adoption of GLP-1 drugs (weight loss drugs) which have reduced consumer appetite for larger food portions. Additionally, Hershey has grappled with historically high cocoa prices, although this issue has seen some improvement over the past ten months.

Despite these challenges, the recent Q3 earnings report presented a mixed picture. Hershey reported net sales of $3.18 billion, a 6.5% year-over-year increase and exceeding Wall Street's expectations of $3.12 billion. Organic sales growth was robust at 6.2%, primarily driven by price increases. This growth rate is considered strong for the packaged food sector, especially when compared to analyst expectations of 3.6%.

However, the company's adjusted gross margin saw a substantial decline of 850 basis points year-over-year, settling at 31.8%. This decrease is attributed to higher commodity and tariff costs, as well as an unfavorable product mix, which more than offset net price realization and savings from supply chain initiatives. This margin compression was a key concern, even though analysts had anticipated a gross margin of 31.5%.

Earnings per share (EPS) for the quarter were $1.30, a 44% decrease year-over-year. While this figure was significantly better than the $1.07 per share anticipated by Wall Street, the year-over-year decline was stark.

Hershey did raise its full-year earnings forecast, but only by $0.09 at the low end of their guidance, projecting $5.90 to $6.00 per share. This modest increase, following a 23% earnings beat in Q3, was perceived by the market as a "de facto guide down," leading to further stock depreciation.

Management Caution and Future Outlook

A significant factor contributing to the stock's negative reaction was the cautious tone adopted by management during the conference call. The company noted that the Halloween season started slower than expected due to warmer weather and a concentration of seasonal purchases in the final week, exacerbated by Halloween falling on a Friday. Furthermore, Hershey highlighted timing benefits in Q3 that would reverse in the current quarter and indicated weakness in its Mexican business.

Looking ahead to 2026, Hershey expresses cautious optimism, with a strong emphasis on "caution." Management appears to be deliberately avoiding overpromising, focusing on long-term delivery rather than short-term quarterly performance. This conservative approach, while potentially frustrating for investors seeking immediate gains, is seen by some as a sign of a professional leadership team aiming to underpromise and overdeliver.

Investment Perspective and Analyst Sentiment

Despite the recent stock performance and the mixed earnings report, there's an argument to be made for taking a contrarian stance. The results were "legitimately very good," exceeding recent performance trends. The cautious tone from CEO Kirk Tanner, who has only been in charge for less than three months, is viewed positively by some as a strategic move by an experienced leader.

Analysts at Piper Sandler have upgraded Hershey's stock from "underweight" to "neutral," citing reduced uncertainty. They also believe that while cocoa prices may remain inflationary, this could moderate as 2026 comes into focus.

For investors looking to diversify away from pure tech stocks, initiating a small position in Hershey at its current low levels (lowest since early July) is considered tempting. While the stock still appears expensive at 28 times this year's earnings estimates and nearly 25 times next year's, the possibility of management's conservative forecasting leading to higher-than-expected numbers in the future could make the stock appear cheaper in retrospect.

Conclusion on Hershey

Hershey has endured a challenging period, marked by a difficult few years and a recent stock plunge following a muddled earnings report. The new management team, led by CEO Kirk Tanner, has adopted a conservative stance on future projections. While the stock may not have definitively bottomed, it is likely approaching a bottom, contingent on belief in Kirk Tanner's leadership. The hope is for a more positive outcome, transforming the recent "trick" into a "treat" for the brand.

Discussion on Target and Costco

The conversation then shifted to other retail stocks. Regarding Target, a caller expressed concern about its stagnant performance despite holding onto half of an initial investment made at its high. The response suggests that even strong retail stocks are currently out of favor, and a longer-term view is necessary.

Costco was highlighted as a more compelling investment. Despite hitting an all-time high in February and experiencing a subsequent decline, it is considered the "best buy in the industry." While Costco trades at a high valuation (45 times earnings), it is noted that it has "never been cheap." The advice is to start a position, especially for long-term growth, rather than focusing solely on yield. The recent negative press about Costco's future prospects is dismissed as likely unfounded.

Other Mentions

• Columbia Sportswear: Mentioned as a potential buying opportunity due to its stock slipping to its lowest level since early 2016 after its earnings report.
• Meta: Briefly referenced with a promise to provide an "opposite view" to the prevailing market sentiment following its earnings report.