Investing.com -- S&P Global Ratings has revised the outlook for U.S.-based The Hershey Co (NYSE: HSY ). to negative from stable due to increasing leverage and a weakening profitability. The revision is attributed to high cocoa costs and the company’s ongoing acquisitions. The Hershey Co.’s leverage is expected to rise to the mid-2x area by the end of fiscal 2025. The company’s ’A’ issuer credit rating and ’A-1’ short-term and commercial paper ratings, however, have been affirmed.

The negative outlook reflects the risk of a potential ratings downgrade if Hershey Co. fails to restore its leverage to the low-2x area within the next 24 months. High cocoa costs and future acquisitions could keep leverage high compared to historical levels. The company’s pro forma leverage is forecasted to increase to about 2.6x at the end of fiscal 2025, from 1.8x as of March 31, 2025. This is based on the assumption that the company will successfully close its recently announced $750 million acquisition of LesserEvil.

Cocoa prices have surged in recent years, peaking at over $12,000 per ton in 2024 and remaining well above $7,000 per ton for most of the year. Despite Hershey’s hedging strategy, the company’s S&P Global Ratings-adjusted EBITDA margins are expected to contract more than 700 basis points in fiscal 2025.

The increase in cocoa prices has been driven by factors such as crop disease, poor weather conditions in West Africa, and poor government policies and underinvestment in cocoa farming in countries like the Ivory Coast and Ghana. As a result, prices have risen back to above $11,000 per ton in May 2025, after retreating to below $8,000 in March 2025.

Hershey Co. is using strategies such as productivity savings, pricing, innovation, and new sourcing strategies to mitigate the impact of higher cocoa costs. The company’s Advancing Agility & Automation (AAA) productivity initiative, announced in early 2024, is on track to achieve $125 million of cost savings in 2025, with additional savings expected in 2026.

However, the weakening macroeconomic environment could limit Hershey’s ability to raise prices. The company’s ability to pass through more significant price increases onto the consumer may be limited if macroeconomic conditions continue to weaken.

Despite the elevated leverage, Hershey Co. remains open to acquisitions, particularly those that diversify its snacking portfolio away from chocolate. In April 2025, the company announced its agreement to acquire LesserEvil, a maker of organic popcorn and other healthy snacks, for $750 million.

Potential tariffs also present a risk. The company could potentially face $100 million in unmitigated tariff exposure per quarter in the third and fourth quarters of 2025. Hershey and other cocoa users are engaging with the Trump administration to seek an exemption for tariffs on cocoa.

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses, specifically with regard to tariffs. As a result, their baseline forecasts carry a significant amount of uncertainty.

The ratings could be lowered if Hershey fails to restore leverage to the low-2x area over the next 24 months. This could occur if the company’s profit margins weaken due to sustained high cocoa costs or higher-than-expected tariffs, or if its operating performance deteriorates. The outlook could be revised to stable if Hershey reduces leverage to the low-2x area, if cocoa prices moderate, if the company is able to pass through price increases to customers, or if macroeconomic conditions improve.

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