The Hershey Company (HSY Quick QuoteHSY - Free Report) is currently trading at a forward 12-month price-to-sales (P/S) ratio of 3.35, significantly higher than the industry average of 2.17. This disparity suggests that investors have historically had high expectations for the company's future earnings growth. However, HSY’s recent stock performance casts doubt on whether these lofty expectations are sustainable. Hershey’s Value Score of C adds to these concerns.

Shares of Hershey have dipped 1.4% in the past six months compared with the industry’s decline of 0.2%. The confectionery products company trailed the broader Zacks Consumer Staples sector and the S&P 500's respective growth of 7.4% and 10% during the same period. 

The combination of a high P/S and a stock decline could mean that the market may be questioning the company's ability to meet these elevated expectations. This discrepancy raises concerns about whether HSY’s current valuation is justified or if the stock is overly inflated in the near term.

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Troubles Looming for Hershey

Hershey is encountering a challenging macroeconomic environment, with consumers reducing discretionary spending and making fewer shopping trips. This has impacted the company’s performance, especially in key channels like convenience stores, where it traditionally thrives. The sharp pullback in consumer demand led to a 20.7% decline in North American confectionery net sales for the second quarter of 2024, underscoring the significant headwinds in the current consumer environment. 

The convenience channel, historically a significant driver of Hershey’s sales, faced notable weakness in the second quarter. As consumers have shifted purchasing habits and reduced on-the-go spending, the slowdown in this channel has been particularly pronounced. This presents a risk for Hershey as it relies heavily on impulse buys and convenience store sales to fuel growth in its confectionery business. 

The broader Ready-to-Eat popcorn category, in which Hershey’s SkinnyPop brand operates, remains under pressure. While SkinnyPop has shown signs of stabilization, the overall category weakness presents challenges to its full recovery. Hershey’s growth in the popcorn space has been slower than anticipated, partly due to changing consumer preferences and increased competition in the salty snacks market. Ready-to-Eat popcorn has been a key growth driver in the salty snacks segment, but its slowing growth poses a potential long-term risk for Hershey, especially as competition from new entrants intensifies.

Moving to margins, Hershey’s gross margin is under pressure from rising input costs, particularly cocoa and sugar prices, which remain elevated compared to historical levels. The adjusted gross margin of 43.2% contracted 200 basis points (bps) year over year in the second quarter. The downtick was mainly due to higher commodity costs and fixed cost deleverage, which outweighed the benefits of price increases, productivity improvements and favorable input cost timing. Even with a well-executed hedging program, these cost pressures are expected to persist through the second half of 2024, creating ongoing margin challenges.

What to Expect From HSY in 2024?

Management now expects overall net sales growth of approximately 2% year over year compared with the previous range of 2-3% for 2024. Hershey anticipates a 200-basis point decline in the full-year gross margin due to inflation outpacing pricing actions and productivity improvements. The company expects adjusted earnings per share (EPS) to decline slightly to a range of $9.49-$9.59 compared with the earlier forecast of no change year over year.

Reflecting these concerns, the Zacks Consensus Estimate for HSY’s current and next fiscal year EPS has declined from $9.50 to $9.47 and from $9.33 to $9.29, respectively.

Navigating HSY: Investors’ Roadmap

While Hershey is committed to growth through strategic initiatives like innovation and saving efforts, recent performance and valuation metrics raise serious concerns. Without a clear catalyst to reverse its recent struggles, the stock could face further downside, and investors may want to approach with caution. Hershey currently carries a Zacks Rank #4 (Sell).

Some Better-Ranked Staple Bets

Here, we have highlighted three better-ranked food stocks — The Chef's Warehouse (CHEF Quick QuoteCHEF - Free Report) , Flowers Foods (FLO Quick QuoteFLO - Free Report) and McCormick & Company, Inc. (MKC Quick QuoteMKC - Free Report) .

The Chef’s Warehouse, which distributes specialty food products, currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers. 

Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2. FLO has a trailing four-quarter earnings surprise of 1.9%, on average. The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.

McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank # 2. The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.6% and 7%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 13.8%, on average.