Hershey Serves Up Yet More Bad News

Hershey Foods Corp. has a huge computer problem--and it has nothing to do with Y2K.

The biggest U.S. candy company warned Tuesday that earnings for this year will miss forecasts as continuing problems stemming from a new computer system prompt more retailers to switch to competitors for candy products.

Profit from continuing operations for the year will be about 10 cents a share below Hershey’s October forecast of $2.16 to $2.20, the company said.

Analysts had already become less optimistic: The consensus 1999 earnings estimate among analysts was $2.12 a share, according to earnings tracker First Call/Thomson Financial.

The latest warning sent the company’s shares down $2.31 to close at $47.81 on the New York Stock Exchange, after trading at a new 52-week low of $46.31.

Hershey, maker of such sweets as its namesake chocolates, Milk Duds and Kit Kat bars, said in September that problems with a new computer system for tracking orders and distributing candies were leaving some customers without adequate supplies and driving up costs.

In turn, some retailers, unsure whether they would get deliveries, in December turned to Hershey’s rivals, including Mars Inc. and Nestle, analysts said. Enough customers have switched to put a dent in Hershey’s December sales.

“They’re not counting on Hershey’s candy being there, given the service problems they’ve had,” said analyst Craig Albert at Sanford C. Bernstein & Co., referring to retailers.

The earnings warning is Hershey’s fifth in seven quarters. Earlier problems included higher-than-expected dairy prices, costs to roll out seasonal candies, and a shift in consumer tastes toward its lower-margin bagged candies and away from its highly profitable candy bars.

“It’s been a tough year,” said analyst Nomi Ghez at Goldman, Sachs & Co. She rates Hershey shares “market perform.”

The latest shortfalls stem from the company’s installation of the new computer system in July. From the start, orders were not being tracked accurately and workers had to do much of the work the system was supposed to handle.

In the meantime, Hershey missed orders to retailers or sent them incomplete deliveries, analysts said. In some cases, the company was then forced to send out extra trucks to fill customers’ needs, boosting costs.

The mishaps are definitely showing up in sales: Consumer purchases of Hershey’s chocolates and candies rose just 1.7% for the four-week period ended Dec. 5, Ghez said, citing supermarket data collected by Information Resources Inc.

By contrast, purchases of Mars’ chocolates and candies, such as Snickers and Milky Way bars, rose 4.2% in the latest four-week period, Ghez said, and sales of Nestle products, which include brands such as Butterfinger and Baby Ruth, rose 6%.

Overall, Hershey’s sales are expected to total about $4.1 billion for this year, down from $4.4 billion for 1998, according to Value Line Investment Survey.

Hershey’s percentage of orders successfully filled has risen to above 90% recently, compared with only about 65% this summer, but that still is short of Hershey’s goal of 98% completion, analysts said, citing discussions with the company and some of its customers.

Ghez on Tuesday lowered her 1999 earnings estimate to $2.05 a share from $2.15.

She also cut her forecast for next year to $2.35 from $2.50, citing concerns about the company’s ability to successfully open a new distribution facility in Pennsylvania next year.

Hershey needs that facility badly: Value Line notes that the company has suffered from inadequate warehouse space in recent years.

Value Line currently gives Hershey stock the lowest possible rating for “timeliness” in light of the company’s ongoing problems.

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Bitter Taste for Investors

Hershey Foods stock had been a strong performer from 1995 through 1997, but earnings have flattened since then, and the stock has tumbled more than 37% from its peak. Quarterly closes and latest on the New York Stock Exchange:

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Tuesday:

$47.81, down $2.31

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Source: Bloomberg News