Hershey earnings decline 62% in 2007

by Editorial Staff
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HERSHEY, PA. — Net income at The Hershey Co. fell 62% in the fiscal year ended Dec. 31, bringing to a close a difficult year in which the company lost market share to Mars, Inc. and chief executive officer Richard H. Lenny abruptly resigned.

In the year ended Dec. 31, net income totaled $214,154,000, equal to 96c per share on the common stock, down sharply from $559,061,000, or $2.44 per share, in fiscal 2006. Sales, meanwhile, inched up to $4,946,716,000 from $4,944,230,000.

The sluggish full-year earnings were dealt a particularly harsh blow in the just-ended fourth quarter, which saw profit tumble 65% to $54,343,000, or 24c per share. Hershey said the decline reflected increased spending on plant closings in North America, rising costs and overseas expansion. Sales in the fourth quarter were marginally higher, climbing to $1,342,222,000 from $1,336,609,000.

"With respect to gross margins during the fourth quarter, gross margin was down 240 basis points compared with year-ago levels primarily due to higher commodity costs, higher trade promotion spending and unfavorable mix," said Burt Alfonso, senior vice-president and chief financial officer, during a conference call with financial analysts on Jan. 24. "Specifically, dairy costs were up markedly year-over-year and tracked slightly higher than the internal forecast we established at mid-year.

"We believe that dairy stock prices will continue to subside somewhat as we make our way through 2008. However, we expect that dairy will have a negative impact on our first quarter of 2008, because of the timing of increases in 2007."

David J. West, president and c.e.o., said U.S. operations continue to

operate in a challenging environment, with U.S. retail sales in the fourth quarter and full year, in channels that account for over 80% of Hershey’s retail business, climbing 0.9% and 1.3%, respectively.

"Retail takeaway was not as strong in the channels measured by syndicated data, thus market share declined by about 1.3 points in both the fourth quarter and full year in these channels," Mr. West said. "As anticipated, inventory levels at key distributors declined in the fourth quarter. This should lead to shipments and retail takeaway patterns that are more closely aligned in 2008."

In response to an analyst’s question during the conference call, Mr. West said the category growth rate last year was 3.5% and the biggest difference during the year is The Hershey Co. did not drive growth.

"We have to get our programs and our people in line to drive the growth in the category, and that growth came in premium, it came in trade-up and it came in refreshment, where we did not participate as we should," he said.

Mr. West also announced The Hershey Co. would phase out the company’s recently introduced Ice Breakers Pacs from the market. Pacs are nickel size dissolvable pouches with a powdered sweetener inside.

"Some community and law enforcement officers have expressed concern about the shape of the pouch in xylitol form and the possibility that it could be mistaken for illicit items," he said. "We are sensitive to summary judgments and thus made the decision that we will no longer manufacture Ice Breaker Pacs."

Looking ahead to 2008, Mr. West said Hershey’s primary goal is "to stabilize U.S. business marketplace performance."

"Markedly higher brand-building support, including advertising, quality merchandising, enhanced retail coverage and new chocolate products within the premium and trade-up segments will enable us to achieve this goal," he said. As part of that effort, he said Hershey will launch Starbucks and Hershey’s Bliss product lines in March. The new additions are expected to enhance Hershey’s premium and trade-up portfolio and broaden participation in faster-growing segments of the category, he said.

In high-potential emerging markets, Mr. West said Hershey remains on track in its effort to follow a disciplined approach in pursuing appropriate growth opportunities that will increase scale.

"The integration of our joint venture in China and Godrej business in India continues with both businesses operating effectively," he said. "To improve our position in Brazil we have restructured the business and entered into a joint venture agreement with Bauducco, a leading baked goods manufacturer, and will leverage their strong sales and distribution capabilities throughout the country."

Mr. West said a portion of overall commodity and energy costs that are expected to increase in 2008 will be offset by the pursuit of operating productivity and savings from the company’s Global Supply Chain Transformation program.

Hershey expects net sales growth during 2008 to be in the 3% to 4% range, with earnings per share projected at $1.85 to $1.90.

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