I read the Hobbit to my daughter when she was 4 and to my son when he was 6, both closer to 5 and 7. I aimed for 10 pages a night of a pocket edition we have, which meant 25-30 nights or so.
My daughter got really scared with the giant spiders in the forest and wanted to quit, but I managed to convince her to go on. She was happy we did because everything turned out fine in the end. She was bored by the battle at the end of the book, but we got through it.
It's hard to know how much of the story my son understood. I usually reminded him what happened last time every time we started ("They were walking through the forest, remember?" or "Last time, they just reached the mountain!"). The individual parts are easy enough to understand, I think.
They both loved the riddle game with Gollum, and it sparked (or fed) an interest in riddles in both. It's an excellent book when you want to take the step up from children's books.
