Cocoa Deflation on the Horizon: Hershey’s 2027 Visibility and Margin Recovery
Hershey’s Q2 2026 call shifts to cocoa deflation and margin improvement, with a clear line of sight into 2027.
HSY · Earnings Call · 2026-07-30
Keyword Shift: From Tentpoles to Cocoa Deflation
Hershey's second-quarter 2026 earnings call marks a subtle but clear inflection: the conversation has pivoted from the tentpole-and-innovation cadence of recent quarters to a forward-looking focus on cocoa deflation and margin improvement. The company is now peering into 2027, armed with "good visibility into cocoa deflation next year, even if futures remain around current levels" (Kirk Tanner). This shift is not just a change in buzzwords—it reflects a maturing recovery narrative, as Hershey sees its cost curve bending in its favor. The keyword trajectory for the company shows that the previous quarter was all about tent pole activations and Hershey movie hype, but the current quarter's high-momentum terms are almost exclusively about cocoa and margins. That is a meaningful pivot, because it signals that management is confident enough in the top-line story to start focusing on the bottom line.Margin Recovery and Logistics Challenges
Indeed, the numbers support that confidence. Gross margin, which cratered to 34% in early 2025 due to soaring cocoa costs, has recovered to 39.4% in Q1 2026, a 5.7 percentage point year-over-year jump. The trend is clearly upward, and Hershey expects this to accelerate in the back half as it laps the "highest cocoa cost last year." In the prior quarter, CFO Steven Voskuil had already previewed "Q2 gross margins to increase by nearly 300 basis points versus the prior year period," and the company continues to guide to a significant lift. Gross margin at 39.4% in Q1 2026, up 5.7 points year-over-year. Despite this optimism, the quarter wasn't without friction. Hershey's Dots business—one of its growth stars—hit some supply chain speed bumps. As Kirk Tanner explained, "We really like what we're seeing from a consumer standpoint... we have had some growing pains and keeping up with strong demand." These challenges forced Hershey into spot freight and higher logistics costs, which CFO Steven Voskuil flagged as a temporary drag: "we expect to see some margin improvement in the second half as we move to capture that demand and also optimize the supply chain while still having a little bit of a tail of elevated freight and logistics costs." This is a company that has built a reputation for top-line growth and is now learning to manage the operational complexities that come with it.Cocoa Supply and the 2027 Framework
The cocoa supply picture is the linchpin of the 2027 framework. Hershey's management remains calm despite recent El Niño speculation driving prices up. In a decisive statement, Steven Voskuil asserted:That confidence underpins the company's reaffirmation of its 2027 targets—2% to 4% organic sales growth and an earnings framework built on the assumption of deflation. The company has repeatedly described its ability to participate in further downside via hedging structures, and the current cost visibility is clearly better than a year ago. Back in February, Voskuil noted, "We're glad to see that the cocoa financial markets finally begun to reflect some of the fundamentals we've been describing for the last eighteen months." Today's stance is a natural extension of that shift. Hershey is also positioning itself to capture share through innovation and seasonal execution, with a robust Halloween plan and the Hershey movie offering a compelling back-half narrative. However, the stock is down 7.8% over the past 90 days, reflecting the market's wariness about the consumer and the macro backdrop. The company is trading at a forward P/E that still embeds a meaningful recovery, and the successful execution of the cocoa-driven margin expansion will be critical. In summary, Hershey's Q2 call is a story of cautious optimism. The keyword shift to Cocoa supply and margin improvement underscores a transition from defense to offense, with a clear line of sight into 2027. The operational kinks in Dots and the lingering logistics overhang are transitory, and the company's strategic focus on productivity, innovation, and cost discipline positions it well for a year of recovery. As Kirk Tanner said, "we have solid visibility into our cost structure." That visibility is the new currency for Hershey.El Nino speculation is certainly impacting pricing today and lately but we do not expect Cocoa to remain at current levels long term for a few reasons. If you remember the '23, '24 cycle, this is very different from that. And a couple of factors that we're seeing. One, we're coming off of historic surpluses. Inventories are healthier supply is more diversified, and the industry is much more agile.