In February, Hershey Co. (NYSE:HSY) unveiled a new grand strategy, the Global Supply Chain Transformation (GSCT), a half-billion dollar initiative to streamline production and send it to more cost-efficient markets. The company took a major part of this hit in the second quarter earnings report announced today, with net income of $3.55 million and EPS of only $.01.

Taking out the costs of GSCT steps such as the construction of a new plant in Monterrey, Mexico and cooperative ventures in China and India, and net income would have finished at $0.35 EPS, still down appreciably from 2006 year/year of $0.42.

The company reported strong sales in high price-point products such as dark chocolate, but new items and refreshments fell short of their target. Increased dairy prices were one element blamed when the company revised its 2007 earnings outlook in May, warning investors to expect diluted EPS from operations to grow only 4-6% this year.

The brightest spot of the report was the announcement that Hershey will be producing Starbuck's-branded (NASDAQ:SBUX) chocolate for sale in the coffee merchant's locations.

It's still early days to evaluate the impact of the GSCT on performance, but the sales shortfall has to be a cause for concern. Investors will be looking for a sweeter report before the end of the year.