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Wednesday, June 18, 2008
Hershey cuts profit goal, to focus on major brands

Tuesday June 17 2008

(Adds analyst comments)
By Brad Dorfman

CHICAGO, June 17 (Reuters) - Hershey Co cut its long-term earnings growth target on Tuesday and laid out a strategic plan to boost its biggest U.S. brands with more advertising and greater focus on popular candies.
The largest U.S. chocolate company, which has been losing U.S. market share to Mars Inc, also stood by its 2008 earnings forecast, which is above the average Wall Street estimate. It said it expects profit to increase in 2009, but be limited by rising commodity costs.

Some analysts questioned whether the company's plan to increase advertising spending by 20 percent in each of the next two years would boost sales enough to overcome soaring costs for items like cocoa and energy. Hershey has also had trouble reaping the benefits when it increases list prices because deals it had with retailers required it to offer price-cutting promotions.

"Given the increase in commodity costs and the company's inability to realize price, we believe such an increase in advertising may be insufficient to drive earnings growth this year and next," J.P. Morgan Securities analyst Terry Bivens said.

Hershey, whose shares were down 1.7 percent in afternoon trading, spent $127.9 million on advertising in 2007. Its advertising agency is Arnold Worldwide, a unit of France's Havas SA.

Unveiling the strategic plan to analysts, David West, who was promoted to chief executive from chief financial officer last year, acknowledged that attempts to move into areas like cookies and snack bars had hurt the company's mainstay products like Hershey chocolate bars and Reese's peanut butter cups.

The moves in recent years "diverted key resources, both financial and human, away from our core at a time when others were ramping up," West said.

Rival Mars upped the stakes even more in April when it agreed to buy chewing gum maker Wm Wrigley Jr Co in a deal that would make it the world's largest confectionary company.

But West said Hershey would still be the largest U.S. chocolate maker.
Aside from fixing the U.S. business, the company will also look to expand further in emerging markets like India, China, Brazil and Russia through joint ventures, acquisitions and other arrangements.

The Hershey plan was about what analysts had expected.
"In general, we like the fact that they are starting to ramp up true marketing spending and support the brands," said Edward Jones analyst Matt Arnold. "They had a habit of underspending on true marketing and spending on promotion instead."

Hershey set a long-term annual earnings-per-share growth goal of 6 percent to 8 percent, down from its previous target of 9 percent to 11 percent.

It set an annual sales growth goal of 3 percent to 5 percent, compared with 3 percent to 4 percent previously.

Hershey stood by its 2008 earnings forecast of $1.85 to $1.90 a share before one-time items. Analysts, on average, expect $1.82, according to Reuters Estimates.

When Mars agreed to buy Wrigley, it prompted speculation about consolidation in the global candy industry. Hershey was seen as a possible target.

But the Hershey Trust, which controls almost 80 percent of Hershey's voting stock, has repeatedly said it is required by Pennsylvania law to maintain voting control over Hershey.

On Tuesday, West said the Hershey Co board evaluates strategic alternatives and that it works on behalf of all shareholders, not just the Hershey Trust.

"Nothing from a value creation standpoint is not on the table," West said.
While Cadbury Plc has been rumored as a potential merger partner, West said the only conversations Hershey is having with the British company involve how Hershey uses the Cadbury name that it licenses in the United States.

Analysts have said Hershey could enter a joint venture with another candy maker, such as Switzerland's Nestle SA, to help increase its international distribution.

In the United States, Hershey plans to increase spending on advertising and develop products to appeal to different customers, West said.
One example is Reese's Whipps, a lower-fat product for consumers who like candy but are concerned about their health. In the past, the company offered new products like a white chocolate Reese's peanut butter cup that merely attracted consumers who were already buying Reese's products.

Aside from past ill-advised innovations, Hershey is playing catch-up in the premium chocolate segment, a fast-growing part of the U.S. chocolate market.

West said the company's new Starbucks Corp chocolates not only let the company take advantage of the strong Starbucks brand, but boost distribution for other premium Hershey chocolate brands.

He said the company's new individual, higher-end Bliss chocolates are on track to exceed sales expectations in their first year.

Hershey shares were down 62 cents to $35.25 on the New York Stock Exchange. The shares have fallen more than 10 percent this year, compared with a 1.4 percent decline in the Standard & Poor's U.S. packaged food index .15GSPFOOD. (Additional reporting by Helen Chernikoff in New York; editing by Jeffrey Benkoe and John Wallace)

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