July 25, 2007

 

Hershey's earnings offset by high dairy prices

 

 

Chocolate and milk manufacturer Hershey's have operating margins drop to 3.1 percent for the quarter ended July 1, with costs rising to US$1 billion (0.7 billion euros to US$870 million) compared to same period in 2006 due to high dairy prices, the company said in its latest financial report.

 

Richard Lenny, Hershey's chairman, in a statement said higher dairy costs and slower than expected improvement in the US business impacted results for the second quarter.

 

Net sales remained the same for the period at US$1.05 billion, however greater costs meant profit was down.

 

The company said Reese's, Hershey's and Kisses delivered a 4 percent gain in sales behind these brands, but this was offset by lower sales of some other brands, leaving retail sales down 0.4 percent for the quarter.

 

Lenny admits Hershey's first half results did not meet expectations but focused investment behind core brands has proven to be beneficial, stressing new product innovation should become more sustainable.

 

This comes the same week as the company announced the completion of its partnership with Barry Callebaut, to receive 80,000 tonnes of liquid chocolate a year in the US.

 

It also ventured in India as Godrej Hershey Foods and Beverages Company and production with Lotte Confectionery has begun in China, as part of its strategy to move into emerging markets.

 

The company said it would focus on the retail sales of dark and premium chocolate following higher growth of its retail sales.

 

A new factory in Mexico is also underway, with production expected to begin by mid-2008. This factory will supply Hershey with liquid chocolate.

 

The report said the company looks to "invest accordingly" throughout the second half of the year, with new products such as Reese's Whipps and developing products within the key global markets.

 

But it expects more pressure on margins as higher dairy costs will continue, resulting in a decline in earnings.

 

Net income was down to US$97 million in the six months up to 1 July, from US$220 million in the same six months in 2006. Net income for the second quarter was US$3.5 million, compared to US$98 million for the same quarter in 2006.