Jan. 24 (Bloomberg) -- Hershey Co., the largest U.S. candy maker, said fourth-quarter profit plunged 65 percent and forecast an unexpected drop in 2008 earnings, sending the shares lower.

Net income fell to $54.3 million, or 24 cents a share, from $153.6 million, or 65 cents, a year earlier, Hershey said today in a statement. Excluding one-time expenses, profit was 54 cents, 1 cent less than analysts' estimates.

Annual earnings declined for the second time since 2001 as the chocolate maker lost market share to Mars Inc. while milk and cocoa prices climbed. The trust that controls the company replaced eight of 11 board members in November after saying it wasn't ``satisfied'' with the company's results.

``Nothing is new, things are just worse,'' Vincent Andrews, an analyst at Morgan Stanley, wrote in a note today. ``Guidance will likely more than overwhelm the otherwise disappointing-on- all-levels fourth quarter.'' He recommends investors hold their shares.

Hershey forecast profit, excluding one-time costs, of $1.85 to $1.90 a share this year, down from $2.08 in 2007. Thirteen analysts surveyed by Bloomberg estimated average profit of $2.19. The company sees sales rising 3 percent to 4 percent.

Hershey fell 71 cents, or 2 percent, to $35.68 at 4:05 p.m. in New York Stock Exchange composite trading. The shares dropped 30 percent in the past 12 months.

Sales Rise

Fourth-quarter sales climbed less than 1 percent to $1.34 billion, the Hershey, Pennsylvania-based company said.

Costs for dairy and cocoa are at ``significantly'' higher levels than historical averages and Hershey expects commodity and energy costs to increase at similar levels in 2008.

Executives said today that higher expenses for milk will hurt first-quarter profit.

``It's kind of a perfect storm for them,'' said Walter Todd, a principal at Greenwood Capital Associated LLC in Greenwood, South Carolina, which sold its Hershey shares last year. ``They've got the input cost situation, which is squeezing margins, they're having to spend more on advertising, which is squeezing margins, and the competition is more intense.''

Nonfat dry milk prices during the fourth quarter were 93 percent above last year's, and cocoa surged in December to $2,400 a metric ton, above the long-term average of $1,600, Eric Katzman, an analyst with Deutsche Bank Securities Inc., wrote in a Jan. 17 note to investors.

David West

Hershey, which also makes Reese's Peanut Butter Cups, lowered its annual forecast three times last year. Rick Lenny stepped down as chief executive officer in October and was replaced by President David West.

Excluding costs to cut jobs and change production, Hershey earned 54 cents. Analysts estimated profit of 55 cents a share, according to the average of 13 projections complied by Bloomberg. Ten analysts predicted sales of $1.31 billion.

``Hershey's share losses to Mars show no signs of abating,'' Alexia Howard, an analyst at Sanford C. Bernstein & Co., wrote in a Jan. 17 note. She recommends holding Hershey shares.

For the year through Dec. 29, Hershey retail sales rose 0.4 percent, compared with a 4.3 percent industrywide increase, according to Howard. Closely held Mars's chocolate sales climbed 9.2 percent.

Hershey said today that market share dropped 1.3 percentage points during the quarter.

Credit Outlook

Standard & Poor's said today it was more likely to lower Hershey's `A' credit rating following the report. About $2.1 billion would be affected.

``While Hershey is still the leader in the U.S. candy market, we are concerned about continued market share loss, performance deterioration, and weak guidance for 2008,'' S&P said.

Hershey's attempt to lift profits by selling more dark chocolate has fallen short of efforts by Lindt & Spruengli AG, the maker of Ghirardelli chocolate, and Nestle SA. Competitors are taking advantage of growing demand from consumers seeking health benefits from cocoa, an ingredient in all chocolate.

Hershey is trying to counter flagging sales by cutting expenses. Last February it announced plans to reduce 1,500 jobs and move production to Mexico. The company is also working to boost its advertising budget. Most confection companies spend about 10 percent of sales on advertising, while Hershey spends less than 3 percent, according to Katzman.

Higher Advertising

Hershey plans to increase advertising and coupon spending 20 percent next year, executives said on a call with analysts and investors.

Hershey increased prices in April for the first time in two years, boosting Reese's and its namesake chocolate bars 4 percent to 5 percent.

The company will outline new growth targets in a meeting during the second quarter, West said on the call. The company has forecast in the past that sales will rise 3 percent to 4 percent annually, resulting in earnings gains of as much as 11 percent.

Hershey said it will introduce in March chocolate under the Starbucks Corp. brand and start selling a new line of premium chocolates called ``Bliss.''

The Hershey Trust controls 78 percent of the voting power and 31 percent of the equity in Hershey. It was established by founder Milton Hershey and his wife, Catherine, in 1909, and exercises voting rights on behalf of the private Milton Hershey School.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: January 24, 2008 16:31 EST