Hershey posts lower net on charges, cuts outlook

By Brad Dorfman

CHICAGO (Reuters) - Hershey Co. (HSY.N) on Thursday posted a 96 percent drop in second-quarter net income and again cut its 2007 profit forecast, sending its stock to its lowest level in almost three years.

The chocolate maker said quarterly results had suffered from charges for a supply chain overhaul and higher dairy costs, while it is also spending more money to try to jump-start flagging sales.

"They are getting some growth in their core brands, but considering the increase in the marketing spend, I think we would have expected better performance," said Morningstar analyst Mitchell Corwin.

Aside from facing higher costs, Hershey's has not been keeping pace with competitors in the fast-growing premium and dark chocolate sector.

To try to help address this, the company on Thursday announced a deal with Starbucks Corp. (SBUX.O) to market premium chocolate under the coffee shop chain's brand, starting this fall.

Hersey's net profit dropped to $3.6 million, or 1 cent a share, from $97.9 million, or 41 cents a share, a year earlier.

Excluding one-time charges, earnings were 35 cents a share, matching the analysts' average forecast compiled by Reuters Estimates.

Sales were flat at $1.05 billion, below the $1.07 billion that analysts were expecting.

REAL PRICING DOWN

Hershey announced price increases of 4 percent to 5 percent in April. But previous promotional agreements with retailers and coupons it issued for its new Cacao Reserve dark chocolate bars caused its realized pricing to fall 1 percent in the quarter, the company said.

"Promotional agreements hurt them from taking the pricing as quickly as they needed" in light of rising dairy costs, said Edward Jones analyst Matt Arnold.

Arnold, who rates the stock a "buy," said the company should benefit from easier sales comparisons later this year and in 2008.

In recent quarters, Hershey has been losing market share to MasterFoods USA, the unit of Mars Inc. that makes M&Ms and other candies. Hershey has been focusing spending on its Reese's, Kisses and Hershey's lines, and those products saw a 4 percent increase in retail sales in the quarter.

But sales of recent new products -- once an area where Hershey did better than other food companies -- proved disappointing, dragging total sales by retailers down 0.4 percent.

For the year, Hershey said it expected earnings from continuing operations to fall to $2.25 per share from $2.37 a year earlier, with sales rising at a low single-digit percentage rate.