Hershey cuts profit goal, to focus on core brands

CHICAGO Tue Jun 17, 2008 1:09pm EDT

A row of candy bars manufactured by Hershey is seen in a vending machine in Washington June 17, 2008. REUTERS/Jim Bourg

A row of candy bars manufactured by Hershey is seen in a vending machine in Washington June 17, 2008.

Credit: Reuters/Jim Bourg

CHICAGO (Reuters) - Hershey Co (HSY.N) cut its long-term earnings growth target on Tuesday and laid out a strategic plan to boost its biggest brands in the United States with more advertising and tighten development of new products.

The largest U.S. chocolate company also stood by its 2008 earnings forecast, which is above the average Wall Street estimate, and said it expected profits to increase in 2009, but be limited by rising commodity costs.

The stock fell 1 percent in mid-day trading.

In unveiling the plan to analysts, David West, who was promoted to chief executive from chief financial officer last year, acknowledged that attempts to move into areas like cookies and snack bars hurt its mainstay products like Hershey bars and Reese's peanut butter cups.

The moves in recent years "diverted key resources, both financial and human, away from our core at a time when others were ramping up," West said during an analyst meeting in New York.

Hershey has endured soaring prices for energy and ingredients like cocoa, while it lost market share to rival Mars Inc, the maker of M&Ms. In April, Mars agreed to buy chewing gum maker Wm Wrigley Jr Co WWY.N in a deal that would make it the world's largest confectionary company.

West said the company would still be the largest U.S. chocolate maker in the U.S. after the Mars-Wrigley deal. Fixing the core business -- with such measures as a 20 percent increase in advertising annually for the next two years -- will provide the bulk of its sales growth as it looks to expand in emerging markets like India, China, Brazil and Russia though joint ventures, acquisitions and other arrangements.

Hershey set a long-term annual earnings-per-share growth goal of 6 percent to 8 percent, down from its previous target of 9 percent to 11 percent.

It also set an annual sales growth goal of 3 percent to 5 percent, compared with 3 percent to 4 percent previously.

Hershey stood by its 2008 earnings forecast of $1.85 to $1.90 a share before one-time items. Analysts, on average, expect $1.82, according to Reuters Estimates.

MARS EXPANDING

In April, Mars agreed to buy Wrigley for $23 billion, prompting speculation about consolidation in the global candy industry. Hershey was seen as a possible target.

But the Hershey Trust, which controls almost 80 percent of Hershey's voting stock, has repeatedly said it is required by Pennsylvania law to maintain voting control over Hershey.

On Tuesday, West said the Hershey Co board evaluates strategic alternatives and that it works on behalf of all shareholders, not just the Hershey Trust.

"Nothing from a value creation standpoint is not on the table," West said.

While Cadbury Plc CBRY.L has been rumored as a merger partner, West said Tuesday the only current conversations Hershey is having with the British company involves how Hershey uses the Cadbury name that it licenses in the U.S.

Analysts have said Hershey could enter a joint venture with another candy maker, such as Switzerland's Nestle SA (NESN.VX), to help increase its international distribution.

LeRoy Zimmerman, chairman of the Hershey Trust, said in a newspaper opinion piece on Sunday that the trust had hired merger-and-acquisition advisers more than a year ago to look at strategic options.

In the U.S., Hershey plans to not only increase spending on advertising, but also develop products to appeal to different customers, West said.

One example is Reese's Whipps, a lower-fat product for consumers who like candy but are concerned about their health. In the past, it offered new products like a white chocolate Reese's peanut butter cup that merely attracted consumers who were already buying Reese's products.

Aside from past ill-advised innovations, Hershey is playing catch-up in the premium chocolate segment, a faster-growing part of the U.S. chocolate market.

West said the company's new Starbucks Corp (SBUX.O) chocolates not only let the company take advantage of the strong Starbucks brand, but also boost distribution for other premium Hershey chocolate brands.

He also said its new individual, higher-end Bliss chocolates are on track to exceed sales expectations in their first year.

Hershey shares fell 35 cents at $35.52 Tuesday on the New York Stock Exchange. The stock is down almost 9 percent this year, compared with a 1.4 percent decline in the Standard & Poor's U.S. packaged food index.

(Additional reporting by Helen Chernikoff in New York)

(Editing by Maureen Bavdek/Jeffrey Benkoe)

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