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    Hershey's Sales Fall, Profit Tumbles 66 Percent

    Quarterly c-store sales fall short of expectations.

    Despite sales improvement in core brands, The Hershey Co. reported lower sales and a sharp drop in net income in the third quarter ended Sept. 30, 2007.

    Consolidated sales were$1.399 billion, compared to 1.416 billion for the quarter last year.

    Net income for the third quarter of 2007 was $62.78 million or 27 cents per share-diluted, compared with $185. 13 million, or 78 cents per share-diluted, for the comparable period of 2006.

    "Throughout 2007, our top priority has been to restore momentum within the U.S.," said Richard H. Lenny, chairman and CEO. "Against a backdrop of severe commodity cost pressures and strong competitive activity, we're maintaining this focus. In the third quarter we experienced improvements in key aspects of our portfolio. Importantly, our seasonal programs got off to a solid start, and increased consumer investment resulted in a 3.5-percent gain in U.S. retail takeaway with improvements occurring in all classes of trade.

    "In our core chocolate business, retail takeaway was up almost 6 percent, roughly twice that of the year-to-date period. This above-trend gain was led by Hershey's top four chocolate brands, which had a combined gain of better than 8 percent, including strong growth within dark chocolate, and improved retail execution. This performance resulted in a sequential improvement in chocolate market share during the quarter."

    Total company market share, off 1.1 share points, was adversely impacted by increased category innovation, particularly in premium chocolate and refreshment, and aggressive competitive programs at selected retailers, Lenny said.

    Reported net sales for the quarter were down 1 percent, primarily driven by the timing of seasonal shipments and a significant reduction in inventory levels at distributors, the company reported.

    "This reduction is the result of slower-than- anticipated improvement in the convenience store class of trade and tighter credit conditions for these distributors," Lenny said.

    Third quarter profitability was curtailed by lower sales, including increased trade promotions, and the impact of higher dairy costs, he added.

    During the fourth quarter, Hershey's investment in consumer and customer programming will be up markedly when compared to both the just-completed third quarter and the fourth quarter of 2006, Lenny noted.

    "The focus will be on Hershey's iconic brands, new products, such as Cacao Reserve and Reese's Whipps, customer- specific events and expanded retail coverage.

    "We do expect a sequential improvement in marketplace performance in the fourth quarter. However, continued competitive activity as well as a tightening of inventory levels at select distributors will dampen sales performance in the fourth quarter. Therefore, organic net sales for 2007 are expected to decrease about 1 percent. Profitability will be impacted by higher dairy costs and increased business investment," Lenny concluded.

    The 55-year-old Lenny recently announced he will retire as CEO at the end of the year. He also stepped down from his position on the Hershey Trust Board.

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