The Profit from the largest U.S. candy maker

Hershey Co., the largest U.S. candy maker, said profit plunged 96 percent on expenses to eliminate jobs and higher dairy costs. The company forecast a drop in annual profit and the stock declined 3.6 percent.

Second-quarter net income fell to $3.55 million, or 1 cent a share, from $97.9 million, or 41 cents, a year earlier, the company said today in a statement. Sales were little changed at $1.05 billion, trailing analysts' estimates.

The elimination of 1,500 workers and the transfer of some operations to Mexico cost the company $124.4 million before taxes in the quarter. Dairy expenses have increased, and the company lost market share to rival Mars Inc., known for its Snickers bar and M&M's candies, hurting sales growth.

``It's taking a lot longer for them to get on the road to recovery,'' said Alexia Howard, a Sanford C. Bernstein & Co. analyst in New York, who has an ``underperform'' rating on the shares.

Hershey expects annual per-share profit from operations of $2.25, down from an earlier estimate of $2.46 to $2.51. The company had earnings of $2.37 a year earlier. It predicted sales will increase by the ``low-single'' digits on a percentage basis. Previously, it estimated a 3 percent to 4 percent gain.

``That's a fairly big shift in guidance,'' said Howard. It was the second time in two months that Hershey lowered its annual profit forecast.

Excluding Costs

Excluding costs of 34 cents a share for the restructuring, the company said it had second-quarter profit of 35 cents, matching the average analyst estimate in a Bloomberg survey. Ten analysts predicted sales of $1.06 billion. Hershey in May forecast profit from operations of 34 cents to 35 cents.

Hershey shares fell $1.79 to $48.15 at 11:26 a.m. in New York for the biggest drop in two months. They had risen less than 1 percent this year through yesterday, trailing the 9 percent gain in the Standard & Poor's 500 Index.

``We understand the missteps over the past few quarters and we are aggressively addressing them,'' Lenny said on a conference call with analysts and investors.

Hershey lost 1.5 percentage points in market share in the quarter, led by the mint and premium-chocolate categories, Lenny said. The company plans to increase its sales force by 30 percent to help spur faster revenue growth, he added.

Lenny has blamed the market-share loss on poor sales of limited-edition products, such as a mocha-almond Hershey bar. The company is increasing marketing for Reese's products, as well as dark chocolates, its fastest growing business in 2006.

Premium Chocolate

The company's premium chocolate under its Cacao Reserve and other lines aren't performing as well as competitors, Lenny said. Hershey said today that it will make and distribute a Starbucks Corp.-branded premium chocolate line starting in 2008.

Hershey's growth in premium chocolate ``has not kept pace with the competition,'' Lenny said. ``This will change.''

Hershey in April increased prices for the first time in two years, raising prices for Reese's and its namesake chocolate bars 4 percent to 5 percent.

Dean Foods Co., the biggest U.S. milk processor, last month cut its profit forecast for the second time this year because of soaring raw-milk costs. The price of skim-milk powder, the benchmark for world trade, has more than doubled in the past year as demand for dry milk and other dairy products rose.

Mars, a closely held company based in McLean, Virginia, has increased its share of the U.S. candy market on demand for new varieties of M&Ms and Dove bar.

To lower costs, Hershey is moving some production to Mexico, cutting the number of assembly lines and eliminating 1,500 workers. The company has said the reductions will cost as much as $575 million before taxes. Hershey predicts it will save $170 million to $190 million annually by 2010 in employee and factory expenses.

Of 20 analysts covering Hershey in the past year, four rate the stock ``buy,'' 14 recommend ``hold'' and two say ``sell.''

see:bloomberg.com