Hershey Profit Falls but Outlook Upbeat

Candy maker Hershey Co. (HSY) Thursday posted a 28 percent drop in quarterly profit due to charges related to measures to streamline operations in North America.

But sales of new products and price increases offset higher commodity costs, with the company saying 2005 sales and earnings from operations will be above its long-term goals.

"Commodity costs are incrementally concerning here," Christopher Growe, analyst at A.G. Edwards & Sons, said in a research note. "Cocoa costs are mostly in check, but higher nut, sugar, packaging and fuel costs could constrain earnings growth beyond our current projections."

Hershey executives declined to comment specifically about commodity costs during a conference call with analysts.

Hershey shares were down 29 cents to $59.20 on the New York Stock Exchange.

The maker of Reese's peanut butter cups (search) and KitKat bars (search) said profit was $119.5 million, or 48 cents a share, compared with $166.2 million, or 66 cents a share, a year earlier.

Excluding the charges, earnings were 75 cents a share. On that basis, analysts' average forecast was 74 cents a share, according to Reuters Estimates.

The company said in July it would close a gum manufacturing plant in Puerto Rico and also cut an unspecified number of jobs to free up funds to invest in products, marketing and other items.

The plan will result in $140 million to $150 million in charges, or 41 cents to 44 cents a share after taxes, most of which will be taken this year, Hershey said.

Sales rose 9.1 percent to $1.37 billion, beating the consensus analyst estimate of $1.35 billion posted by Reuters Estimates. Excluding acquisitions, sales would have been 6.5 percent higher.

The company said it expects sales in 2005 to increase more than its long-term goal of 3 percent to 4 percent, while earnings per share from operations should beat its 9 percent to 11 percent target increase.

For 2006, the company forecast another sales increase above 3 percent to 4 percent, with earnings per share rising slightly more than 9 percent to 11 percent.

"Our plans reflect a step-up in new product innovation while capitalizing on key growth opportunities with the more profitable classes of trade," Richard Lenny, chairman and chief executive, said in a news release. Those more profitable outlets include convenience stores, a spokeswoman said.

Hershey, which had been one of the strongest performing food companies, saw its stock fall more than 9 percent in the third quarter, while the Dow Jones U.S. Food Products index (search) rose 1 percent.

Still, Hershey shares trade at 22.4 times next year's estimated earnings, compared with only 16.4 percent for the index, based on Wednesday's closing prices.