The Hershey Company (HSY) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-17, FY ended December 31, 2025) + Yahoo Finance

Auditor: Ernst & Young LLP — Unqualified opinion

One-line verdict: Hershey's FY2025 was defined by a cocoa cost crisis that crushed gross margin from 47.3% to 33.5% — a 1,380 basis point collapse — while revenue grew 4.4% to $11.7B. Net income plunged 60% to $883M as cocoa and sugar costs surged through the P&L. Yet operating cash flow of $2.28B produced a CFFO/NI ratio of 2.58, demonstrating that the earnings collapse is driven by real commodity costs flowing through inventory, not accounting manipulation. The M-Score of -2.79 is clean. Cash of $926M covers only 16% of $5.7B in debt, and goodwill plus intangibles of $5.8B sit at 126% of equity — two balance sheet fails. But the company is generating nearly $1.75B in free cash flow even in a historically bad cocoa year. Hershey's problem is not fraud or financial engineering — it's a commodity price shock on a company with enormous pricing power that hasn't yet fully caught up.

The Business: Confectionery Dominance Meets Cocoa Shock

Hershey operates three segments: North America Confectionery (81.1% of sales, $9.5B — Hershey's, Reese's, Kisses, Kit Kat), North America Salty Snacks (10.9%, $1.3B — SkinnyPop, Dot's Pretzels, Pirates Booty), and International (8.1%, $942M). Per the filing, the company's largest customer, McLane Company, Inc., accounts for approximately 27% of consolidated net sales.

In November 2025, Hershey acquired LesserEvil, LLC, an organic popcorn and puffed snack producer, recording goodwill and $604.5M in intangible assets ($303M trademarks, $301.5M customer relationships). The acquisition of Sour Strips was completed in November 2024.

Profitability: Cocoa Destroys Margins

The gross margin collapse from 47.3% to 33.5% is the central story. Cost of sales surged as cocoa prices reached multi-decade highs. The filing shows COGS grew 31.7% while revenue grew only 4.4%. Unallocated mark-to-market losses on commodity derivatives totaled $423.2M in FY2025 versus $460.4M in gains in FY2024 — an $884M swing. North America Confectionery segment income fell from $2,946M to $2,494M. International segment income collapsed from $111.5M to just $3.3M.

Cash Flow: Remarkably Resilient

The CFFO/NI ratio of 2.58 requires context. Net income dropped 60% but CFFO only dropped 10%, creating a mechanically high ratio. This is because cocoa mark-to-market losses are non-cash items that depress earnings without affecting operating cash flow. Depreciation is also adding back normally. The positive takeaway: $1.75B in FCF demonstrates the business generates substantial cash even in a commodity crisis year.

Hershey issued $2.0B in new notes in February 2025 (4.55% to 5.10% coupon rates), with proceeds of $1,985M used partly to repay maturing debt.

The 18-Point Screening

Revenue Quality

Revenue quality is clean. AR declined while revenue grew — the opposite of channel stuffing.

Expense Quality

B4 — The gross margin swing is historic. A 1,380 basis point decline in one year is extraordinary for a consumer staples company. This is driven entirely by cocoa and sugar input costs, not operational deterioration or margin manipulation. The GMI component of the M-Score at 1.41 is elevated but the overall M-Score remains clean at -2.79.

Cash Flow Quality

Balance Sheet

D3 — Soft asset growth of 34.5% reflects the LesserEvil acquisition ($604.5M in intangibles) and equity investments in tax credit qualifying partnerships ($11.9M net receipts vs $285.5M payments in FY2024). The LesserEvil purchase price allocation was preliminary at filing.

Acquisition Risk

Manipulation Score

Key Risks from the 10-K

1. Cocoa and Sugar Cost Escalation

The single largest risk. Cocoa prices reached historic highs, and Hershey has significant forward purchase commitments. The company typically locks in commodity costs 3-12 months ahead, meaning the current cocoa environment could continue pressuring margins through much of FY2026.

2. Customer Concentration — McLane at 27%

"Our largest customer, McLane Company, Inc., accounted for approximately 27% of our consolidated net sales in 2025." Dependence on a single wholesale distributor for over a quarter of revenue creates significant counterparty risk.

3. International Segment Near Breakeven

International segment income collapsed from $111.5M to $3.3M. The segment is essentially generating no profit. Per the filing, "business realignment activities" of $59.4M were recorded, suggesting ongoing restructuring in international operations.

4. Acquisition Integration — LesserEvil and Sour Strips

The LesserEvil acquisition in November 2025 added $604.5M in intangibles with a preliminary purchase price allocation. Goodwill "reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth." The purchase price allocation must be finalized by mid-2026, and adjustments could materially change recorded asset values.

5. Competition from Private Label and Other Snacks

"We continue to experience increased levels of in-store activity for other snack items, which has pressured confectionery category growth." The cocoa-driven price increases may accelerate consumer trade-down to private label alternatives.

Summary

Grade: F. Two balance sheet fails driven by structural leverage and acquisition-heavy intangibles, compounded by a historic gross margin collapse from cocoa costs. But cash flow quality is strong, manipulation risk is low, and the franchise remains intact.

Hershey's 33.5% gross margin in FY2025 is a commodity price shock, not a business model failure. The company that delivered 47.3% gross margin in FY2024 still holds the same brands, the same market positions, and the same distribution. CFFO of $2.28B and FCF of $1.75B demonstrate that the operating engine generates substantial cash even in crisis conditions. The M-Score of -2.79 and accruals ratio of -10.1% confirm this is not earnings manipulation.

The F grade reflects real structural concerns: $5.7B in debt against $926M in cash, $5.8B in goodwill/intangibles at 126% of equity, and a margin environment that may not normalize quickly. The two watch items — the 13.8pp gross margin swing and 34.5% soft asset growth — add to the concern. But this is a high-quality franchise under commodity duress, not a deteriorating business with accounting red flags.

**Disclaimer**: This report is based on The Hershey Company's FY2025 10-K filed with SEC EDGAR on February 17, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Ernst & Young LLP (Unqualified opinion)

Fiscal year ended: December 31, 2025