updated 7/19/2007 10:49:32 AM ET 2007-07-19T14:49:32

Hershey, the nation's largest candymaker, on Thursday reported its profit tumbled 96 percent in the second quarter as it spent heavily to begin transforming its production lines and revive flat sales.

The company's share prices fell in morning trading. Meanwhile, it announced that it will make a major new entry into the fast-growing premium chocolate market with Starbucks-branded chocolates.

The Hershey Co. earned $3.6 million, or a penny per share, for the three months ending July 1. That compares with a profit of $97.9 million, or 41 cents per share, in the same period a year earlier.

Not counting what Hershey spent on changes to its production and supply chain, the company's profit would have been $81.7 million, or 35 cents a share, matching the consensus estimate of analysts surveyed by Thomson Financial.

Revenue for the Hershey, Pa.-based maker of Hershey's Kisses and Reese's was virtually steady at $1.05 billion. Analysts surveyed by Thomson Financial projected revenue to be almost $1.07 billion.

Performance was mixed in the quarter, with improving sales of dark and premium chocolate and some core brands offset by sluggish sales of other products, company chairman and chief executive Richard H. Lenny said.

"The company's performance during the first half is not what we've come to expect or what we're capable of delivering," Lenny told analysts on a conference call. "We've completed a detailed assessment of what's working and what's not, and are making the appropriate shifts in plans and execution."

In May, Hershey slashed its outlook for the year, citing disappointing domestic sales and higher dairy costs. The company also said it is spending more on advertising to try to reinvigorate sales and fend off stiffening competition.

On Thursday, the company issued a forecast similar to that in May, with sales growth in the low-single digits and earnings growth in the mid-single digits.

For the first six months of 2007, Hershey earned $97 million, or 42 cents a share, on revenue of $2.2 billion, compared to earnings of $220.4 million, or 91 cents a share, on $2.19 billion in revenue at the same point last year.

Difficult year for chocolate maker
The past year has been tumultuous for Hershey.

It has yet to recover from its stumble last fall while shifting from one product platform to the next. Advertising flopped, leaving stores backed up with its older products.

In February, Hershey announced a major restructuring designed to cut costs and excess production capacity in the United States and Canada, while expanding in Mexico, China and India, where labor is cheaper and Hershey hopes to sell more candy.

Since then, Hershey has announced it will close six U.S. and Canadian plants and cut more than 3,000 workers in the two countries, including up to 900 at its hometown plants. It has plans to shift more production to contractors and a new plant it is building in Monterrey, Mexico.

On Thursday, it said production is underway in China through a joint venture with South Korea's Lotte Confectionery Co. and its joint venture in India with Godrej Industries Ltd. is up and running.

The joint venture with Starbucks Coffee Co. is expected to put a Starbucks-branded line of premium chocolate in a wide range of retail outlets.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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