Oct. 18 (Bloomberg) -- Hershey Co., the largest U.S. candy maker, said third-quarter profit plunged 66 percent and sales unexpectedly fell as it lost market share and dairy costs rose.

The maker of Hershey chocolate bars and Reese's Peanut Butter Cups lowered its annual earnings and sales forecasts, and the shares tumbled as much as 4.6 percent.

Hershey's market share fell 1.1 percentage points in the quarter as Mars Inc., the maker of M&Ms, won sales. Net income has dropped for four straight quarters, and the trust that holds a controlling stake in Hershey has criticized management. Chief Executive Officer Rick Lenny said this month that he plans to step down.

``There's no immediate fix for this,'' said Walter Todd, a Greenwood Capital Associates LLC principal who sold his shares earlier this year. ``They are losing market share in a slowing market, which is the worst of all worlds.''

Greenwood, based in South Carolina, is affiliated with WealthTrust LLC, which has holdings in nine investment firms that manage $6 billion.

Net income declined to $62.8 million, or 27 cents a share, missing analysts' projections by 4 cents. Sales dropped 1.2 percent to $1.4 billion. The company, which gets 11 percent of its sales outside the U.S., didn't say what impact the weaker dollar had on earnings.

Hershey dropped 2.7 percent in New York trading, the biggest decline in two weeks, after lowering its annual earnings forecast by as much as 7.6 percent. Earlier it was down the most in two months. The stock fell 11 percent this year through yesterday, trailing an 8.7 percent gain on the Standard & Poor's 500 Index.

Dark Chocolate

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, which are taking advantage of growing demand from consumers seeking health benefits from cocoa, an ingredient in all chocolate.

A study published in July showed that patients who ate dark chocolate daily reduced their blood pressure.

``The problem is that the Hershey brand is a mainstream brand that finds it difficult to really get any traction in those more premium segments,'' said Alexia Howard, an analyst at Sanford C. Bernstein & Co. in New York.

Lenny has said Hershey's Cacao Reserve and other premium chocolates aren't performing as well as competitors.

`Not Held Our Share'

``We have not held our share certainly in that segment,'' Hershey President David West said today on a conference call with analysts and investors. ``This year we have been playing defense, next year we will be playing offense.'' West will replace Lenny as CEO later this year.

Hershey shares dropped $1.24, or 2.8 percent, to $43.05 at 4:03 p.m. in New York Stock Exchange composite trading.

Hershey is trying to counter flagging sales by reducing expenses. In February it announced plans to reduce 1,500 jobs and move production to Mexico.

Earnings per share excluding the costs from the job cuts will drop to $2.08 to $2.12 a share this year, compared with an earlier forecast of $2.25, Hershey said. Sales will decline about 1 percent, below its forecast for an increase in the ``low single digits'' on a percentage basis.

Excluding 41 cents of costs to cut jobs, Hershey earned 68 cents a share in the quarter. Analysts estimated profit of 72 cents a share, according to the average of 15 projections complied by Bloomberg. Nine analysts predicted sales of $1.44 billion. Profit a year earlier was $185.1 million, or 78 cents a share.

Price Boost

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 price increase had ``little impact'' on the quarter because it was canceled out by discounts Hershey had previously promised to retailers, Chief Financial Officer Bert Alfonso said on the call.

The company plans to increase advertising 20 percent in the fourth quarter, West said. Hershey will also introduce chocolate under the Starbucks Corp. brand and start selling a new line of premium chocolates called ``Bliss'' next year.

Nonfat dry milk prices rose 20 percent from the first quarter and are more than double what they were a year ago, Eric Katzman, an analyst at Deutsche Bank Securities Inc., wrote in an Oct. 15 note. He is one of 15 analysts who have a ``hold'' rating on the stock. Three others recommend buying Hershey, and two say ``sell.''

This year's ``biggest single challenge was dairy costs,'' said West.

Mars, a closely held company based in McLean, Virginia, has increased its share of the U.S. candy market by selling more varieties of M&Ms.

Criticizing Performance

The Hershey Trust said last week it's dissatisfied with the chocolate maker's performance.

Members of the trust explored ways of putting Hershey together with Cadbury Schweppes Plc without decreasing the trust's ownership, the Wall Street Journal reported last week. The trust tried and failed five years ago to sell the company after opposition from Pennsylvania lawmakers.

West declined to comment on the report during the conference call.

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: October 18, 2007 16:17 EDT