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Hershey Profit Falls 66% as Costs Increase

Hershey on Thursday posted a 66 percent drop in quarterly profit, hit by higher costs for ingredients such as milk, restructuring charges and falling sales amid aggressive competition from Mars.

Hershey's Chocolate Kisses
Carolyn Kaster
Hershey's Chocolate Kisses

Hershey shares were down about 4 percent Thursday, as earnings from operations were below analysts' estimates and the company also said 2008 will continue to be challenging.

The largest U.S. chocolate maker said profit was $62.8 million, or 27 cents a share, in the quarter, compared with $185.1 million, or 78 cents a share, a year earlier.

Excluding charges, earnings were 68 cents a share. Analysts on average had forecast 71 cents a share, according to Reuters estimates.

Sales fell 1.4 percent to $1.40 billion, and were below the $1.44 billion average analyst forecast compiled by Reuters Estimates.

Sales were hurt by tighter credit conditions for distributors and slower-than-anticipated improvement in convenience store sales, the company said.

Losing A CEO and Market Share

The earnings report comes two weeks after Chief Executive Richard Lenny unexpectedly announced plans to step down at year-end. He will be succeeded by Chief Operating Officer David West on Dec. 1.

West said in an news release that the company is "evaluating alternatives to improve our consumer and customer value propositions throughout the entire portfolio," but he gave no details.

The company also plans to continue spending to support premium chocolate products, as well as its core brands and global expansion in 2008.

"This ongoing work, combined with input cost volatility, makes for a challenging operating environment," West said.

Hershey said it lost 1.1 percentage points of market share in the quarter as competitors had more new products, especially in the premium chocolate segment.

"Continued competitive activity as well as a tightening of inventory levels at select distributors will dampen sales performance in the fourth quarter," Lenny said in a news release.

For the full year, Hershey forecast earnings of $2.08 to $2.12 per share before restructuring charges, well below analysts' average forecast of $2.24.

The company is in the midst of overhauling its supply chain, cutting jobs, reducing the number of production lines by more than a third, outsourcing production of some products, and building a manufacturing plant in Mexico.

Hershey shares stood at $42.60 in premarket trading, down from a Wednesday close at $44.29 on the New York Stock Exchange.

At Wednesday's close, the stock was trading at 18.3 times estimated 2008 earnings, compared with a multiple of 26.6 for rival confectioner Wm Wrigley Jr Co.

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