Hershey's Bitter Chocolate

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Starbucks (Nasdaq: SBUX) isn't the only one having a hard time with high dairy prices and other rising costs. Hershey (NYSE: HSY) really can't seem to sweeten up its profit -- its fourth-quarter results were a bit on the bitter side.

Hershey's fourth-quarter net income skidded 65% lower to $54.3 million, or $0.24 per share, missing analysts' expectations by a penny. Sales were basically flat at $1.34 billion. And margins melted as the gross margin dropped to 31.1% from 36.1% and the net margin fell to 4% from 11.5%.

The company said the quarter was "in-line" with its expectations, and reflected "a challenging environment that includes higher input and operating costs, as well as heightened levels of competitive activity." Raw material costs, particularly dairy, is the toughest issue the company faces.

This is nothing new for Hershey, though -- it's been having an abysmal time over the past year. So it's no surprise its forecast for 2008 doesn't look so sugary either, with management expecting $1.85 to $1.90 per share. That represents a decrease from 2007 earnings of $2.08 per share. Ouch.

Chocolate lovers are going to have to pay up for their sweet tooth fix because inflationary pressures have forced Hershey to raise prices on its products by an average of 13%. This makes me wonder if customers will be willing to pay the higher prices, especially when many people are finding themselves short of disposable income. And of course, raising prices could lead consumers to find alternative brands such as Tootsie Roll (NYSE: TR), Rocky Mountain Chocolate Factory (Nasdaq: RMCF), Wrigley (NYSE: WWY), and Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) See's.

True, the company's planning new advertising initiatives and new products in the hopes of drumming up growth again and fending off the competition. (Its Starbucks and Hershey Bliss products are set to launch in March.)  But Hershey doesn't look like a tantalizing potential buy until it shows it can get its act together, and at the moment, I'd say that's still up in the air.

Don't forget, the company recently got a new CEO, and controlling shareholder Hershey Trust has done some housecleaning on the board of directors. These may end up being good long-term moves, but for now, things are still in flux. Although I've never met a chocolate I didn't like, Hershey shares sound pretty darn unappetizing right now.  

It wasn't exactly a sweet year for Hershey:

• Hershey got creamed in July.
• There were no kisses in April.