Chit Chat Stocks - Shorting Hershey (Ticker: HSY) with Edwin Dorsey

Episode Date: November 16, 2023

The Hershey Company (HSY) is a renowned chocolate and confectionery manufacturer, well-known for its iconic brands, but facing the impact of changing consumer preferences and competition in the candy and snacking industry. Listen as Brett and Ryan ask questions about the company, its business model, and its valuation. Enjoy the show! ***************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠ ****************************** Want updates on future shows and projects? Follow us on Twitter: ⁠⁠https://twitter.com/chitchatmoney ⁠⁠ Subscribe to our Substack to receive free show notes and charts for our Tuesday episodes: ⁠⁠https://chitchatmoney.substack.com/⁠⁠ Interested in more from Edwin Dorsey? ⁠https://x.com/StockJabber?s=20 Contact us: [e-mail] Timestamps Hershey | (2:29) Short Thesis | (13:26) Mr. Beast's Feastables | (25:13) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst or an investor to discuss a single stock. And today we have on the show, Edwin Dorsey. He is a very popular figure on financial Twitter, and he writes a really good sub stack, probably one of the best out there called the Bear Cave sub stack, where he digs into basically corporate shenanigans and tries to kind of expose any sort of corporate bad practices. and he doesn't actually short the companies. He earns his income from the newsletter. And so there isn't maybe that conflict of interest that a lot of people worry about. And today we're talking about Hershey. And I got to say, before we came into this, I was a little skeptical because

for one, I'm a diehard Reese's consumer, but I also thought, what is this? It was based on this upstart concern or this upstart competitor. And I thought it was really small, but after listening to Edwin kind of pitch a lot of the reasons why Hershey's could be in trouble, it became a lot more reasonable. I could certainly see that side of it. And I think a lot of people that maybe if you're coming into this with a closed mind, be open to it because he provides a lot of really good data to support his belief. But I think with that, we're ready to get to the interview. So without further ado, here's our discussion with Edwin Dorsey. welcome to chit chat money on this show host ryan henderson and brett schaefer interview

industry experts and riff on the world of investing as a quick reminder chit chat money is a ccm media group podcast anything discussed on chit chat money by ryan brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode okay welcome in today we are joined by first-time guest edwin dorsey he is the founder slash author of the bear cave sub stack a very popular sub stack and if you haven't checked it out either look it up on google or you can find it on twitter but we're talking today about Hershey. I guess I'll start with maybe how did you, well, for starters, welcome to the show. And then to follow up, how did you come across this idea of potentially believing in a short

for Hershey's? Where did that investment idea come from? Ryan, Brett, thanks so much for having me on the Chit Chat Money podcast. I'm really excited to be here. So the genesis of this idea is I'm obsessed with YouTube. I watch hours of YouTube every day. I follow a lot of the big YouTubers. And I noticed, you know, starting a year or two ago that a lot of the YouTubers I followed started launching consumer brands. So the obvious one that we're going to talk about a bunch is Mr. Beast, this young 25-year-old YouTuber who launched a chocolate brand called Feastables. But I also saw a lot of other YouTubers launching similar things in the food and beverage space. Logan Paul and KSI had this popular drink called Prime.

Another group of YouTubers had this alcoholic drink called Happy Dad. Celsius obviously got really big, not really on the backs of YouTube, but on the backs of influencer sponsorships. And starting six months ago or so, I had this idea of writing an article called The Great CPG Short, The Great Consumer Packaged Good Short, where I'd highlight how a lot of these high performing consumer packaged good companies with these established brands were kind of like getting eaten away in small bites by these upstarts. And kind of the idea being that the nature of advertising has changed from benefiting the huge incumbents to benefiting the upstarts

who are creating big brands on the backs of their own celebrities. And then when I started looking into all these companies, Coca-Cola, Pepsi, Kellogg, Monster, and Hershey's, the one that I thought was most exposed to this issue, most exposed to new competition from an online creator was Hershey's, which is directly in competition with Mr. Beast and Feastables. So that was kind of the genesis of it is looking at a lot of these YouTubers, seeing the new brands they're launching and seeing, is there any one business that could actually be really affected by that? And I believe that business is Hershey's. Yeah, I have a quick question to start things off. It's Halloween today, which is kind of ironic recording or serendipitous recording time but have you tried the feastables

mr beast feastables and what's your consumer review oh absolutely i've tried it a lot i have a few boxes in my apartment um so they have a lot of different bars so it's not just one bar there's like the original chocolate there's like the crunch bars there's the peanut infused bar called Deez Nuts. I like the peanut infused one. I like the crunch one. The just original plain one is, I don't know, a little plain. Part of the selling pitch for Feastables is all the bars are very simple. They have three, four or five ingredients. And so I thought the plain bar was fine. I really liked the peanut infused one and the crunch one. And I think they're better than Hershey's, but I may be a little biased here. Yeah. And maybe that brings up a quick

follow-up here. Can you explain maybe with the Bear Cave newsletter, your strategy of writing bearish reports on companies, but not actually taking short positions? What's your philosophy with that? Because I think it's quite interesting. So Brett, that is an outstanding question that I get a lot. So just at the high level here, the Bear Cave is a newsletter I've been writing for the last three years since graduating college. And the way it works is there's a free weekly recap that goes out every Sunday where I summarize new activist short reports, highlight notable resignations and share interesting tweets. That's a free version that goes out every Sunday. And then for the paid subscribers on the first and third Thursday of the month, I'll produce

these mini deep dives, roughly 1500 word articles on companies, generally one to $10 billion public companies that I feel are misleading investors or harming customers. And that's what people like will pay to read and then there's free excerpts online. And the unique thing is, even though I'm writing these things that some people consider short reports, I never short the stocks. Instead, I only make money from paid reader subscriptions. So I don't short it. I don't partner someone who shorts and I only make money from paid reader subscriptions. And, you know, the reason I chose that model instead of, let's say, a traditional activist short model of shorting it myself or partnering with someone to short it is what I'm doing is just a little different than a typical

activist short seller. A typical activist short seller doesn't publish frequently. They do a lot of deep work on one idea. They'll look at a lot of numbers, look at a lot of valuation. They might engage a forensic accountant. They might engage private investigators. They'll talk to a lot of former employees and do a tremendous... That's never been my interest. That's never been like something that really appealed to me. I'm better at the early stages of research and I'm heavily document-based. So I'll file FOIA requests with regulators for consumer complaints. I'll read litigation. I'll read a lot of online reviews and stuff. And my skill set is better suited to earlier stage research, more like journalistic mini deep dives, which might not rise to the level

of like a compelling short thesis right away, but does rise to the level of like kind of interesting idea generation for people. You know, I also think my model of making money from paid reader subscriptions rather than shorting the stocks myself is like a lot more defensible from like a moral, legal, and ethical regulatory perspective. As far as I'm concerned, I'm just like a 25-year-old with a popular blog and newsletter. I think it's unlikely I'll get sued. It's unlikely to be accused of market manipulation. I'm just not shorting. So all those are kind of considerations to have. And the final thing is I don't think you can do both. I don't think you can have a really successful paid newsletter product and be shorting it yourself because then all the readers

will say, well, why am I paying you if you're shorting? Shouldn't you take off the paywall? Shouldn't you just make it free? So I think my model is really sustainable. It's good. It kind of fits with my interest and my natural passion, which is diving into these unique issues and writing kind of like more journalistic articles that focus on the qualitative aspects of companies rather than like a quantitative deep dive with valuation and price targets and earnings estimates, which is just not my passion. Now, I really like the model and it makes a lot of sense i'm curious and this is uh kind of an aside from the hershey discussion which we'll have yeah what so you've written a lot of reports and i imagine there's been i can't think of a specific

example but management teams that have reacted to them because you you get a lot of readers and subscribers and i think it has some influence in terms of what people believe what's the worst like, what's the biggest red flag response that you see from management teams? Like, is there a good response to seeing your reports? And is there something where you're like, oh, okay, yeah, maybe I'm really onto something because they seem kind of defensive. So Ryan, the craziest thing was when I was in college, I criticized this publicly traded babysitting platform called care.com. And I was criticizing their safety flaws. And what I did to show that they weren't doing the background checks they claim to be doing in the safety

checks they claimed to be doing is I tried to sign up on this babysitting platform, care.com as Harvey Weinstein. I used a photo of Harvey Weinstein to, you know, made him a completely fake account and pass their background check and show that clearly weren't doing their background checks that they approved Harvey Weinstein to be on their site. And this company called my college and tried to get me in trouble while I was a college student and sent the letter to my house and was like raising hell for me as a college student. So that is definitely the biggest red flag if you're just like randomly harassing a college student in their school um generally though you know good responses will just be measured in fact based and directly dispute

the allegation bad responses will have a lot of puffery not to respond to anything and try to be threatening like oh we're going to take legal action we're going to contact a regulator this is false but not actually like address the core allegation you know so that's kind of like the difference between oftentimes it's just ignored. And I'm generally writing on bigger companies and generally writing on something new every two to three weeks. So most of the time companies will ignore me and just think I'm going to move on. But the key for, you know, seeing a short report is are they just criticizing the messenger or are they doing anything that addresses the message? So a good example would be Reed Hastings back like 10 years ago when Whitney

Tillson released a short report. He had this very famous blog post that was reposted to Seeking Alpha where he kind of just went point by point and disputed like the case. He didn't call Whitney Tillson names. He didn't threaten litigation. It just went through the case point by point and laid out the opposing view. And, you know, not coincidentally, Netflix has been like a 10 bagger since that. So, you know, you always want to see like short responses that are substantive and address the criticisms. Yeah. I mean, that's one of the best management teams out there. Now, we're going to get to the thesis, but I think people maybe don't understand exactly what Hershey owns.

So can you go through their whole business? Because I know people understand the Hershey bars, but maybe they're not aware that they own stuff like Reese's and pretzels as well. So Hershey's at a high level is a 130-year-old company founded in the 1890s, roughly $40 billion market cap. And they've about $10 billion of sales. $8 billion of their sales is kind of like this North American confectionery business, which is largely chocolate. Their two biggest brands are Hershey's and Reese's Peanut Butter Cups. They also own a few, like they have Kid Cat that's licensed in the US for them. They have Mr. Good Bar and a few other smaller brands.

And then they have more of a candy or salty snack division. They own Jolly Rancher. They acquired Skinny Pop a while ago. They own Pirate's Booty. But the crux of my concerns is this U.S.-North American confectionery business, $8 billion of their $10 billion in sales, which is largely Hershey's and Reese's. That's kind of the crux of my concern. And that's really the crux of their business. They don't have a huge international presence, and they don't have a ton of other big brands other than Hershey's, Reese's, maybe Kit Kat and Jolly Rancher. Chitchat Money is brought to you by Interactive Brokers, but we like to call them by their ticker symbol IBKR. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies, charges USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees, the ability to trade stocks, bonds, options, futures, commodities, and more with high interest rates paid on instantly available cash balances, and the ability to lend your eligible stock shares to earn passive income all on one

single unified platform. Restrictions may apply. For more information, visit IBKR.com. Member SIPC. Open an account with IBKR today. Okay, that leads right into it. What is the high level thesis? Why are you concerned about? And And well, to be fair, we should say for the listeners, maybe give context of when you wrote this, because a lot of this stuff, the concerns have started to appear, you know, as we're recording this on Halloween in October 2023. So I wrote my article, Problems at Hershey, in July 2023, and the stock is down about 20% since then.

However, I think they still have more problems, and I think it's still a great short, and there's a lot to play out. So the overwhelming, like majority of my thesis here, overwhelming majority of my concerned is new competition from Feastables. So like we mentioned briefly earlier, Feastables was a chocolate brand founded in January of 2022. So it's less than two years old by this incredibly popular, probably the most popular YouTuber ever, Jimmy Donaldson, this 25-year-old who has a channel called Mr. Beast. He regularly pulls in like about a billion views every month. His new videos constantly get 100, 200, 250 million views. This guy is the most popular YouTuber to ever

exist and continues to grow. And I think he's just a fascinating person. So if you're interesting in this thesis, you need to learn a little bit about Jimmy Donaldson and his new chocolate brand Feastables, even though it was launched less than two years ago, has had a tremendous amount of traction. They're in every Walmart and Target. And oftentimes they're like placed right next to Hershey's and he's made it clear that they're going to be competing directly with Hershey's. he's directly attacking Hershey's. And my idea is that this company is going to start taking share from Hershey's and start taking small share, and then we'll take bigger share over time and make a major dent in their profits, which will, you know, cause the earnings multiple to come

down. I think this upstart company that no one really seems to be talking of or is aware of is going to have like making a dent in Hershey's. And that seems to a lot of people to be a little ridiculous. Will a company that's less than two years old unseat a 130-year-old company? Will a 25-year-old entrepreneur with limited experience outmaneuver a $40 billion company? And even if Feastables turns out to be a big success, how big of an effect could this have on the Hershey's business? And in response to my article, there was a lot of criticism from traditional Wall Street types. And the three kind of common points of criticism around Feastables and just creator brands in general is first, you know, creator brands like Feastables are insignificant,

you know, in size compared to Hershey's. That's kind of criticism number one. Criticism number two is, you know, even it might get sales, but it'll never get the distribution to compete with Hershey's, which has been around forever and has established relationships. So the second criticism is around distribution. And then the third criticism is even if it gets sales, even if it gets distribution, what happens in all these cases is the established brand like Hershey's will just pay a few hundred million or billion dollars and buy it out. So those are the three big criticisms on why Feastables will not make a dent in Hershey's. And I thought it would be useful in this podcast to maybe go point by point and address those criticisms. So the first

criticism, you know, here around Feastables and Hershey's is that it's naive to think an upstart is going to get significant share on the scale of Hershey's $8 billion in North American chocolate sales. And the common things people like to post on Twitter is like this screenshot from this May 2022 Business Insider article that Feastables did $10 million of sales in its first three months of operation. And people post that article and are like, Edwin's so stupid. It's doing $10 million of sales and Hershey's is doing $10 billion of sales. How could that possibly make an impact? And I don't think people realize they're kind of making my point when they post that article, because it is true when Feastables first launched in its first three months of operation, strictly online, it did about $10 million in sales, according to this Business Insider article, which is about a $40 million annual run rate. But now in year two, you know, the sales, as far as I can tell, are about 10 times larger.

I think Feastables is ballpark here, a $300 to $500 million a year business for this year, 2023, and it's growing rapidly. And the evidence for Feastables being that big, it's kind of tough to parse because it's not a publicly traded company. They don't have financials. But in a September all-in podcast last month, Mr. Beast was interviewed by David Sachs, who asked, how big is the business for you? And he said, this is our second year. We'll do a couple hundred million and later said they could expand to a billion over time. And in a July interview, Mr. Beast's manager, Reid Duscher, said, you know, we're not sure how Hershey's can compete with us seasonally, but Halloween is going to be big for us. we think October can be $100 or $200 million in a single month. So if they're saying that we're doing a few hundred million dollars this year, we might do $100 or $200 million in Halloween alone,

that kind of gives this idea that Feastables is a ballpark $300 to $500 million a year business this year, which isn't as big as Hershey's with $80 billion in North American chocolate sales, but is big enough to maybe create a dent. And if it's growing 10x from year one, 2022 to year two, with 2023, how big is it going to be next year? And will it cause a bigger dent in Hershey's next year? Number two is around distribution. People say it's easy for a creator to create an upstart brand, but it's tough. You can get a few sales online. It's tough to get actual distribution. What I'd highlight is that every Walmart at the end of last year was carrying Feastables. By July of this year, Target announced that Feastables was in every Target. And almost

every 7-Eleven I've been in, I've been able to find Feastables. On one of their recent websites, Feastables had an event with Shopify, like a live event around getting Feastables in New York City. And on that website, Feastables said it was in over 18,000 stores already. So there's 4,700 Walmarts in the US. There's 2,000 Targets. There's about 9,500 7-Elevens. So even if you assume they're in all of those, it's about 16,000 stores. Then they're in over 2,000 other stores. Mr. Beast has said in some podcasts, they hope to be around 40,000 stores by year end. So they're getting tremendous distribution. And I would say, if you're a Hershey's investor, go into any Walmart, go into any Target, and you'll see in the candy aisle, there's tons of

Hershey's and right next to the Hershey's and like equally prominent placement, maybe not with like as much shelf space, but on the same shelf, there's Feastable bars. And of course that, you know, is going to impact Hershey's losing a little bit of shelf space and giving consumers new option, especially when Hershey's hasn't had like any real chocolate competition in over 100 years. So they're oftentimes have these having some of the best placement within like the biggest retailers. And I, you know, I bought Feastables on a lot of different occasions and a lot of different stores. And I always like just go get a Feastables bar and talk to the cashier and say, like, is this popular? Is it good? I don't know. And every time they're like, yeah, we're seeing

like a ton of it. It's selling out. We need to restock it like it's more popular than Hershey's. It's definitely a thing that even the cashiers are aware of is like really popular and it's just kind of taking over. So point number one, it's not as big as Hershey's yet, but it's significant. $300 to $500 million ballpark in sales, which is obviously going to make somewhat of a dent to Hershey's $8 billion, especially if they're on the same distribution shelves placed right next to Hershey's and is an option for a parent with like an eight-year-old kid. Instead of buying the Hershey's bar, I'm going to buy you a Feastables bar because I hear

about Mr. Beast all the time. And then the final point people like to make is, you know, I've seen this story play out. Some creator starts a brand and then it starts to grow. And then even if it gets the sales, even if it gets distribution, if they're lucky five or six years down the road, you know, the bigger brand with bigger distribution is going to come in and acquire them for 500 million or a billion. And, you know, in a podcast in September, Mr. Beast Manager was asked this exact question, you know, what number would cross the threshold of where you take an acquisition offer from one of the big CPG companies if they came to you at the end of the year? And Mr. Beast Manager, you know, helps runs his chocolate company said, I don't think we would take a multi-billion dollar acquisition right now. There's just too much upside in the business. The opportunity for us is just way too big to even look at an acquisition offer right now.

For us, we haven't even rounded first base yet to what this business opportunity is. And when you take these like three kind of points together, to me, it's fascinating. It's like a compelling argument that Hershey's could be affected by this. If Feastables, you know, this year, this $400 million, but next year, given it grew 10x since last year, next year, it doubles to $800 million. I mean, that's 10% of Hershey's business. Now, obviously, I don't think, you know, every sale from Feastables is taking a sale from Hershey's one for one. But, you know, I do think it's taking some sales. It might be creating some new market by getting new chocolate consumers, but it's definitely taking some sales from Hershey's, especially if it's taking retail space from Hershey's and it's placed right next to Hershey's and it's going after kids and the parents of kids and it's releasing Halloween bags. So you buy it for Halloween. Feastables has also said that in early of next year, right now, they just do chocolate bars. And early next year, they want to release like a Reese's Peanut Butter Cup competitor. And we don't know what that'll look like, but that's another direct competition with Hershey's.

You know, if it's doing 800 million next year, which I don't think is a stretch at all, you know, let's say half of it is taking share from Hershey's. I mean, that's a 5 percent volume decline and that's significant and it's going to continue to grow and grow over time. And it's something the market, as far as I can tell, has not priced in at all. So if you do a 5% volume decline next year, let's get aggressive and say maybe a 10% volume decline in two years. It's like 10% volume decline leads to a higher decline in profit, as always, like ballpark 30%. Plus, the valuation would plummet if Hershey grows from an anemic grower to a volume decliner

to profits going down. You might go from 22 times earnings to 11 times earnings or see some huge drop there if it's a declining business. And, you know, it sounds kind of odd, but I really think it could happen. And if Feastables does really take off and take share from Hershey's, you might see Hershey's get cut in half or even more. And then compounding on top of that, it's not like Hershey's has a lot of things going for it in other dimensions. I think there's a lot of other headwinds that are going to hurt the Hershey's business. like Wegovy and Ozumpec, the weight loss drugs, they already have a rich valuation with a $40 billion market cap. There is new candy competition. Most of my focus is around

Feastables, but there's a new candy company, Smart Sweets, that has low sugar candy. And in just seven years, they've gone from zero to over 100 million in sales. You know, I think there's general health headwinds in the US where people are trying to eat healthier soda consumption has been flattened or declining in the last few years in the US. And overall, I think Hershey's just has mediocre management and weakening brands. I think Mars with M&Ms and Skittles, those to me are vibrant brands. People love them. Hershey's Bars and Skinny Pop, I don't know. I don't think it's connecting as much as maybe it was 20 years ago. So combine all that together, that at a high level is my Hershey's short thesis.

yeah i've got a number of follow-ups coming to mind why don't we start with a little more on feastables what advantage do you think the the feastables brand has going up against the bigger competitor here so feastables you know is primarily advertised within mr beast's own videos so this segment might be a little tough to describe like for people to understand if they haven't seen Mr. Beast before. But one example I cite in my article is like Mr. Beast does a lot of like viral stunts often around charitable giving. I highly recommend everyone check out his channel. It's fascinating. And when he launched Feastables in July 2020, he built a chocolate factory, like, you know, a mock-up chocolate factory. And he had a video, I built

Willy Wonka's chocolate factory. He flew out 10 random people who purchased Feastables bars, like similar to willy wonka's chocolate factory and he had them compete in a video that got over 200 million views and was great marketing for festivals he flew in cordon ramsay who tasted feastables versus hershey's and said feastables was better you know in a more recent video um mr beast uh one second here you know mr beast uh had a competition where you know he he made a a video earlier this month called the world's most dangerous trap where he flew in one contestant and had them go through like 10 you know difficult traps each time they'd win a hundred thousand dollars if they competed that completed the trap um but if they failed in any one of the traps

they'd lose all the money and the sixth trap in that video which has over 140 million views and just this month um you know was to rate which is better feastables or hershey's and he said you you need to pick which one tastes better for $100,000 and you need to throw the other one in the trash. And in this video, which has been viewed 150 million times, the walls are painted with Hershey sucks. And this guy needs to pick which one tastes better, Feastables or Hershey's. And of course he takes Feastables, wins the $100,000. And there's this like huge clip where he takes the Hershey's bar and throws it in the trash. And, you know, it sounds a little silly, but it's driven $400 million in sales this year, ballpark wise. And that's the advantage in terms

of marketing is this guy connects with the younger generation, the eight to 18 year old demographic, unlike anybody else. And he's been dominant Mr. Beast on YouTube for the last five years. He grew up doing YouTube. He's been obsessed with YouTube since day one. You know, I, you know, Mr. Beast is like, not, not just like a fad of the last year or two or six months. He has been consistently the dominant personality around YouTube for the last five years. And it's just continuing to grow. So the advantage they have is they have this like, not paid marketing, but just like, like the most popular internet celebrity, you know, of our time has this brand and people love him. People want to support him. People love the marketing within the videos. He has Tom Brady

tasted. He has Pete Davidson tasted in his videos. He's like doing these stunts around it and kids gravitate towards that. So if you're a kid, if you're a parent of a kid, if you're somebody buying candy on halloween for kids you know you want to buy feastables because it's the cool new thing and hershey's is just like out of touch with this younger generation makes sense and it i liked the other thing you mentioned in your article where it's not just consumers it's fans and yeah you want to talk about how they like were going through the stores and reconfiguring any bad displays yeah so so like one of the the points i try to make is you know hershey's has customers feastables has fans and it might be silly to say who could

be a fan of a chocolate bar but you know in march 2023 mr beast tweeted i need your help next time you see feastables at walmart and soon new retailers if you could clean up the presentation and make it look better that would make me very happy i'm building your team to do this routinely but i just need your help so he tweets out you know can you clean up the displays from my chocolate bar if anyone else did this you know no one would care and be like that's a weird tweet he got over 140 000 likes the tweet was viewed 45 million times and then everybody in the replies starts like some people would make youtube videos where they drive to all the walmarts clean up the feasible's display and like make youtube videos of them doing it all these accounts were replying

like i drove to my local walmart here's a before picture with all the messy displays and here's an after picture where it's all clean and it's kind of like people don't realize the love people have for mr beast and festivals and you know i don't want to like to compare it to tesla in any way but there's like kind of that cult mentality where people who have a tesla love a tesla it's like more than a car to them and people who like you know love mr beast and festivals this is more than like a chocolate brand for them it's it's like the genuine connection everybody has been striving for it's kind of like the young honest upstart versus the who's trying to make a healthier chocolate brand a cleaner chocolate brand against the big corporations that have been like poisoning the

youth forever there's there's like like a movement behind it and you know so so so there is like this just just love for feastables that i i think is an intangible factor here which further goes in their favor. Okay. We've talked a little bit about Feastables now, and I know that's kind of the crux of your thesis here, but there's also some very relevant news that's come out kind of the last couple of months around Ozempic, I think that's how you say it. How do you think that might impact the business? So no doubt about it, it's a negative. One of the things that maybe someone who's not really equated with how these work might think is, oh, if there's a miracle weight loss drug and people are skinny, so they won't feel guilty about eating chocolate and unhealthy

stuff. So that consumption would go up. That thinking is wrong. And it's wrong for a simple reason, which is the way these drugs work, which need to be taken indefinitely, is that these drugs are appetite suppressants. They lower your desire to eat. You'd see interviews with people who take these drugs and almost all of them say, you know, I went from drinking five Diet Cokes a day to I can't stand the taste of it. I went from eating a Pringles bag every day to now I just want one or two chips. You know, I went from eating six chocolate bars, you know, a month, you know, I don't really love the taste of chocolate. So these things we go be, I was in fact, you know, our appetite suppressants, and that's going to hurt like basically all food categories. And the

ones that's going to hurt most are like unhealthy, salty snacks, chocolates, and things like that. It's less a part of my thesis because I'm not sure how big the volume impact is going to be, at least initially. And it seems like the market might even be overreacting to that. So it's like, you know, by some estimates, I saw like 7% of the U.S. will be on it in, you know, five years. And, you know, the 7% that is on it will probably be the like unhealthy 7%, which are probably disproportionate candy and unhealthy food consumers. But like how much of a concrete impact it will have, you know, is like a little less clear to me. But it's another added headwind to the point where you say, like, could Hershey's have 10 percent volume declines two years from now versus where it is today? Well, Feastables is going to have a huge lever to take share.

And if you have people on WeGoV and Ozempic, I mean, that's going to be like, you know, suppressing their appetite for unhealthy things. And that's going to be a further headwind. And I'm not sure how big it'll be. I think it'll be tough to quantify. But when you have a stock that's, you know, 23 times earnings that's never really been scrutinized before and never really shown volume declines and huge profit declines, I think, you know, it could have a big impact on the stock. Yeah, and I think I've seen some data.

And again, it is early. There's a lot of uncertainty of how big the impact will be. It's something like the top decile of candy consumers, or maybe it's not just candy. Maybe it's like junk food. I know it's various studies because you can include just candy and confectionery stuff, or you can also include chips and soda. But it's something like the top decile consumes like 35% of all these things. So even if it's a slow onboard, there could be some impact from the quote unquote power

users here. and i guess that leads into a lot of the pushback investors have against the cpg shorts today you know versus as you're talking about the dtc and kind of internet uh disruptors along with the a lot of people as you said it's a huge theme right now is the ozempic risk but the way they push back is they say hey look historically these businesses have a lot of pricing power basically they can say, hey, we charge Hershey bar, it's two bucks and we can raise it to $2.10 and then $2.20 basically forever. And that's really going to help them maintain their profitability. What do you think about that? Do you think that has changed? Are we in a new

paradigm here? What are your thoughts on the pricing power pushback people have on CPG shorts? So first, just briefly, the Feastables isn't just direct to consumer. It's also in tons of retail. It also has similar pricing power dynamics, if so more, because people love the Feastables or want the Feastables. In fact, I'd argue if anyone has a really pricing power advantage here between Hershey's and Feastables, it's Feastables. Because if you go in, you want to buy the Feastables bar if you care about Mr. B's.

Hershey's, like the common example Warren Buffett gave, I think, at one of his Berkshire annual meetings. He said, Hershey's is a great business because if you go into a convenience store and they say, oh, we don't have Hershey's, we have a chocolate bar for 50 cents, but you can buy the Hershey's bar across the street for 60 cents. You'd cross the street and buy the Hershey's bar. And, you know, because your kind of price and difference, you want the Hershey's bar if you're going to have a chocolate bar. I don't know if that's just true today. Like my kind of gut feeling is that people really care about the Hershey's bar versus like, you know, like there just hasn't been like a lot of new competition around Hershey's and in the chocolate segment. I also have never really like buy with this idea that pricing should be your main lever, because, of course, there is a point at which consumer tastes change where you raise it from a dollar to two dollars, three dollars.

And Hershey's has like maxed out on pricing. Most of their growth has not come from volume. It's come from 5% to 7% price increases. When you max out on pricing, there is going to, it's always beneficial in the short term because people will generally continue their habits in the short run. But eventually someone will look at it and say, you know what, this is, how did it get so expensive? How is this bag of Halloween candy 30 bucks?

You know, I'm not going to do it. And then once those tastes change, they kind of like change irreversibly, even if you lowered the prices down the road. Once you stop going to get your Hershey's bar every time, you know, you stop going forever, at least like, you know, the majority of the time. So I've never been like hugely convinced that, you know, pricing is just this like magical thing that you can raise prices 10% forever and, you know, it'll work. And, you know, it really doesn't work in the face of like volume declines. To offset, you know, a 10% volume decline, you're going to need 11%. it just it just it just i don't see it really like they they used it they used it as much as

they could and you know as far as i'm concerned hershey's like in store is kind of like prices pretty high right now and there's been a bunch of like wall street journal reporting recently about how like a lot of consumers are getting stickers sticker shot around halloween prices and candy prices like hershey's i do not think has that much more pricing power left and i don't think have this brand that like people love or i need the hershey's bar and i would never get it like a rival chocolate bar same with reese's i i i don't think they have that brand loyalty i think it's degrading over time brett and i have this like same pricing power debate around uh like cigarettes marlboro especially ultra here in the us but they're valued at uh i think part

of the risk you're saying is they're valued at like eight times earnings so you're saying that we could see part of the multiple compression right if they kind of have the same sort of dynamics as these cigarette companies with probably more competition you you think maybe they deserve to be devalued to like eight to nine times earnings instead of 20 plus you know well i cigarettes are i always thought cigarettes are kind of a unique thing because you can't start like an upstart cigarette company like they're just regulatory they kind of have this like they benefited in this way by like making it impossible to smart a new cigarette company i don't know if that's like exactly where i just just pricing you know it works in the short run

it's always a short run benefit but people do have their limits and it's not you know like there's just tons of news reporting now about like consumers getting like sticker shock at these prices and um i i think that's a sign that maybe you're like priced out and you can't push through another 10% price increase without seeing huge volume declines. And the thing that is going to kill this stock isn't going to be whether or not they can push through another 3% or 5% price increase next year. It's that I think you could see volumes decline 10% in the next two years. And more importantly, decline 10% with the potential for more declines going forward. And two quarters from now, three quarters from now, they're going to be saying, analysts will

be saying, why do you have a 2% volume decline when you predicted 1% volume growth and eventually management will need to say the word Feastables. And then all of Wall Street will be like, what the heck is Feastables? Let me dive into it. Oh my goodness, this thing is growing faster than we've ever seen in just two and a half years. It became a billion dollar brand and it's taking over retail space. And Wall Street's going to have like a huge, another panic, similar to what you're seeing now with the GLP-1 weight loss drugs. And that's going to take the stock down a lot. But unlike the GLP-1s, I think Feastables will have a big lasting impact. Right. I'd be very worried about i kind of like at the right price some of the tobacco stocks you know everyone

can have their own you know some people don't like investing in those but if there was like the availability for people to compete with them i don't know if i'd like them that much even if they're trading at such a discounted valuation so yeah i mean if you're right here things could get even it could be even more of a tough operating environment than the tobacco businesses which have had volume declines for decades now. But sorry, Ryan, do you have a follow-up? Yeah, I've got a hypothetical for you. So let's say you were a Hershey's investor today

and tomorrow Hershey's comes out with a press release that says we're buying Feastables for $6 billion. Are you happy with that? I would be ecstatic. I'd want to know the terms. Like I'd want to like because obviously Mr. Reese is going to promote it a lot when he owns it. And what you don't want is like I don't think it works if he doesn't own it. Does that does that kind of makes sense? Maybe like a better phrasing would be if Hershey said we bought a 51 percent state for three billion.

Mr. Reese is like, I think that would be great. In fact, you know, one of the things we kind of talk about is how could this go wrong? How could I be wrong here? well, if Hershey's gets benefit from Feastables counterintuitively, either through like a joint venture or something else, then I would be ecstatic. In fact, I'd be looking to maybe get long Hershey's or, you know, I'd be very, very, I think that'd be a huge, huge win. I also think it's very, very unlikely to happen because again, this guy is saying Hershey sucks, is having his contestants throw Hershey's into the trash can. I think he's doing it kind of from not just a business perspective, but like a heart perspective, Mr. Beast had Crohn's disease going up. There's

a lot of processed food that he couldn't eat himself. So part of the reason he's making this better for you chocolate or chocolate, at least with simpler ingredients, it's not like healthy chocolate, but as simple or cleaner ingredients is he wants to build like a candy and food company that could cater to people like him. And that like, doesn't have all the process nonsense that a lot of these other things have. He also, you know, he had this burger joint venture where he was not owning like this burger chain, but was more like just the marketing arm for this thing called Beast Burger, which is a ghost kitchen concept. And that ended in a big dispute with his partner who he felt didn't do a good job of quality assurance. So he has said, the next thing

I do, Feastables, I'm going to own 100% of it and I'm going to own 100% for a while. So answer your question, yes, I think a Hershey's investor should be ecstatic if they had a partnership at festivals and i think the shot of that is like slim to none um i i think they have explicitly said hershey sucks hershey's is out of touch we're competing with hershey's they trash her she's in the videos he's reasoned to um i i don't i think i think that's wishful thinking okay what are you tracking to say to be able to detect if like this thesis doesn't work out Is it just purely Hershey's confectionery volume growth? Like if they continue to grow volumes for the next couple of years, do you say, oh,

maybe this doesn't work out? So I love, love, love that question. So the biggest thing is I listen to every Mr. Beast interview and every interview of people on his team. And I always look to see what's the new commentary on Feastables. And every time it's we're crushing it. It's exceeding our expectations. We're getting more retail space.

We're going to get more shelf space in the next reset. But all like that now, if if they said, oh, you know, actually, like we've had a lot more supply chain issues. This is this isn't working as much as we thought this business actually turned out to be more of a fad. Maybe like then that would be, you know, the commentary from them, which comes out every three months in various podcast interviews. I track that closely. And the commentary was anything less than like exuberant, you know, especially from like a demand side. that would be a really big red flag you know i do go into like every time you know i see a walmart or target or 7-eleven i just go in to see like how the feastables is displayed if for whatever reason they weren't getting as much prominent displays or like had trouble expanding into other

retailers which is i think is unlikely that would be damaging to the thesis now the third thing here that that i don't think any of those are likely i'm very confident feastables will be big that what could happen is maybe Feastables just creates an entirely new market. Maybe Feastables doesn't take any share from Hershey's. It just actually gets new people interested in chocolate who wouldn't have otherwise been interested in chocolate. Maybe Feastables is a gateway drug for getting people addicted to chocolate who then try Hershey's. Because there's a lot of people who aren't chocolate fans now. Maybe they get addicted to Feastables. Oh, I like chocolate. I like Feastables. Let me try Hershey's. I like Hershey's too. I like Hershey Kiss.

i like maybe it somehow just magically expands the chocolate market so they're the kind of kpi we attract is like hershey's volume and like their commentary around feastables if any um and and really like for me right now it's just seeing the success of feastables and trying you know no one on wall street says you know the key thing i'm tracking is youtube interviews and podcast interviews with this one person every three months but i think that's the key thing you got to do here if you're interested in how this affects Hershey's. It's just anytime there's an interview with Mr. Beester's manager, anyone involved in Feastables, try to pick up those little data points on how well it's going. And right now, every time you do that, it's just

kind of like off the charts good. Okay. As we wrap things up, the Hershey stock is off 30% from all-time highs. It's at one of its lowest earnings ratios in years, typically as one of CPG companies. It's had a high valuation. Do you think there is still downside in Hershey shares going forward? And kind of what do you think the magnitude of that downside could be? Because I guess maybe personally, I've changed my opinion on this now, given the Ozempic stuff and the Feastables data you're giving today. I used to think Hershey's was one of the best businesses out there. Historically, it had been. I kind of think at the right price, it's probably a good bet, but I'm just not sure at what, you know, earnings ratio or what price that is. So what

are your thoughts? You said there's more, you think there's more downside. How much more do you think? So I think it's kind of like a little bit uninvestable with this huge feastables risk, because I don't know how much a 10% volume decline would impact profits. You know, it's always disproportionate. It's going to be bigger than 10%. Could it be 50%? Could, you know, 10% volume decline mean this is just not a profitable business? I'm not entirely sure there and i don't think anyone is um what i would say is like i kind of got a feeling even at a hundred dollar stock i'm not sure i'd want to own it because it's 22 times earnings now and even if it was 15 times earnings it's 22 times earnings 23 times earnings at 188 dollars you know even

at a hundred dollars it's just like if the profits are going down and the volumes are going down and you don't think they have like a secret sauce here like i don't think hershey's is any more this like or reese's is like invincible brand that'll be around forever i don't think it connects in that same way um i mean and they have like three billion dollars in that debt they don't have a lot of cash i don't think the management's that good they haven't really innovated at all like when's the last time they released a great new product you know they they do these acquisitions that i view as mediocre like skinny pop you know michelle the the ceo doesn't seem to be like wildly impressive to me she just talks about increasing price i just you know even at 100

bucks even at 15 times earnings if you believe that earnings are going to decline and volumes are going to decline and like i mean i just at least 50 downside to me in the next two years if this plays out as i think it will and i still wouldn't want to own it it's just not compelling debate okay i think we're on to our last question unless brett has any more but let's say that five years down the road hershey's increased volumes that call it low mid-single digits and feastables is people aren't talking about it anymore why do you think that would happen why would feastables not become what you think it could so there's a key man risk here mr beast is kind of revolving around one person and one channel. So maybe he gets unpopular. I think most people

would say, oh, it's a fad. Some things get popular, and then they get unpopular. I think that's unlikely. This guy is having his moment. He's having his year in the sun right now, and it's going to decline, like all things. People want new personalities. And the 25-year-old Jimmy Donaldson makes great YouTube videos, but maybe the 30-year-old Jimmy Donaldson, eight-year-olds no longer want to watch, and you need a new person, you need a new brand, and it doesn't work out so i think that is like how like feastables doesn't work and then the other equally big risk is even if feastables doesn't does work maybe it just doesn't impact hershey's in the way i expect it to um but that's the big risk yeah i think that's all the questions

we have where can people find more of your research yeah so if they just google the bear Cave Newsletter. It'll come up and you can easily find my Hershey's article by just searching it. I'm also really active on Twitter, Edwin Dorsey at StockJabber. So Twitter, Edwin Dorsey or the Bear Cave Newsletter just by Googling is a great way to follow what I'm doing. Awesome. Well, we should throw a disclosure on this and say Brett and I are not financial advisors. I'm not sure if Edwin is Edwin's not a financial advisor either so anything we say

here on Chit Chat Money is not formal advice or recommendation thank you Edwin for coming on the show and thank you to all our listeners for tuning in