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Hershey's Bitter Q3

Are consumers losing their sweet tooth? Probably not, but you can't help asking the question, after seeing Hershey Co. (NYSE: HSY  ) get creamed in its previous earnings report and hearing that the company's controlling shareholder, the Hershey Trust, is losing faith in the confectioner's board of directors. Things didn't get any sweeter this quarter.

Earnings melted by nearly 66%, or $0.27 per share. The bottom line tumbled as the company focused on "restoring momentum within the U.S.," an initiative that increased expenses. The company also faced rising commodity prices, so despite a slight downtick in sales of 1%, cost of goods sold rose by 6.7%.

Rising milk costs and a challenging environment in the convenience-store channel were the main culprits setting back the company's performance. Margins fell across the board, although the company is trying to market higher-margin gourmet and dark chocolate products. Still, about the only sweet element in the press release was the 8% growth in Hershey's core chocolate brands.

The company's stock has traded down nearly 20% over the past 52 weeks. So what does it need to do to get back on track? Well, like Wrigley (NYSE: WWY  ) , Tootsie Roll (NYSE: TR  ) , and Cadbury Schweppes (NYSE: CSG  ) , Hershey is a play on the long-term value of brand equity. But Hershey needs to improve its marketing campaigns to get the top line moving. As someone once said, brands are great, but they need constant nurturing. I'm sure that many shareholders cringed at this report and wondered what Hershey intends to do about its promotional strategies.

In fairness, Hershey isn't alone in its woes, and the numbers didn't come as a shock. The company had warned that sales would slip a little bit. And meanwhile, practically all food retailers and manufacturers are struggling with rising input costs.

In the meantime, investors must remember why they bought Hershey in the first place. It's boasted a strong brand name since 1929 and should be able to work past its current issues. In fact, it's already taking action, having entered joint ventures in China and India to gain cost advantages that its competitors already have access to. It also sports an attractive dividend yield, and that might be worth something if we hit a recession -- and we could, thanks to the economic ambiguity the markets are facing from the subprime- mortgage mess.

Right now, confectioner Rocky Mountain Chocolate Factory (Nasdaq: RMCF  ) is looking much more delectable than Hershey is -- but I won't give up on the company because of the current short-term bumps. Yes, Hershey needs a chocolate fix, but I don't see Hershey Kisses or Reese's Peanut Butter Cups going away anytime soon.

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