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Jonathan J. Smith

TR AT A GLANCE

P/E ► 20.2 AVG EV/EBITDA ► 11.5 AVG ROA ► 5.1% AVG ROE ► 6.5% AVG Debt to Equity ► 0.269 LOW Current Ratio ► 3.37 HIGH Interest Coverage Ratio ► 155 HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Tootsie Roll (NYSE:TR) sells candy, including chocolate, bubble gum, lollipops, and its trademark Tootsie Roll truffles. TR also produces the number one selling (Junior Mint) and number two selling (Dots) movie theater candies. Along with being sold at movie theaters, TR products are given at holidays like Halloween and bought from stores like Wal-Mart (22.4% of 2007 net sales).^[1]

TR competes in the confectioners industry against large companies such as Hershey, Cadbury, and Mars. Candy is most popular during the holiday season (October to March), so these companies rely on the holiday season for annual sales. TR has a different strategy, which consists of selling its top movie theater candies in the summer months. Corn syrup and milk are primary ingredients in much of Tootsie's candy, so the company also contends with rising corn and milk prices. In response, TR invested in more efficient manufacturing equipment. Despite these efforts to reduce cost, TR still lost 9.9% of gross operating profit from 2006 to 2007.^[2] With total gross profit decreasing 10.4% from 2006 to 2007,^[3] TR is a good candidate to be bought out because of its name brand products. Hershey has shown interest in acquiring TR after Mars acquired Wrigley in April.^[4]

[edit] Business Financials

[edit] Confectionery Products

Tootsie Roll produces candy in the form of chocolates, caramels, bubble gum, lollipops, and other confections. These candies are packaged by TR and sold under brand names like Tootsie Roll (chocolate taffy and lollipops), Double Bubble (bubble gum), Charms (lollipops), and Junior Mints (mint chocolates). TR candy is sold at just about every consumer venue, from supermarkets such as Wal-Mart (22.4% of 2007 net sales)^[5] to convenience stores such as 7-11 to vending machines.

From 2006 to 2007, net sales decreased 0.1%, total cost increased 5.3%, and gross profit decreased 10.7% due to the increased costs of commodities like corn and milk.^[6] According to the National Confectioners Association, the total U.S. candy market had $29.1 billion of retail sales in 2007 with $16.3 billion in sales for chocolate.

[edit] Trends and Forces

[edit] TR focuses on niche theater candies to rely less on competitive holiday season.

Candy is in highest demand for holidays -- especially Halloween, Christmas, Easter, and Valentine's Day. Consumers buy candy as gifts for holidays. Thus, confectionery companies rely on the competitive five month holiday season for most of their annual sales. In this time range, TR competes with Hershey, Mars, and Cadbury -- companies who all have at least 500% more market cap than TR.^[7] For the 2007 holiday season, TR tried introducing new products, such as Holiday Tootsie Christmas Chews and Halloween Ghost Dots.^[8] New products did not aid TR's holiday sales, as quarter sales decreased 34.3%.^[9]

TR focuses on the summer movie season for sales -- a strategy different from it's competitors who garner sales during the holiday season. TR has developed many niche products sold in movie theaters. In 2007, TR had 10 of the top 50 theater and home video candies, including the top selling (Junior Mint) and second-highest selling (Dots).^[10] Consumers go to the movies more frequently in the summer, when work is less strenuous and blockbuster films are shown. Thus, TR's highest revenues come in the summer when consumers are at the movie theaters. In 2007, 37% of annual sales were in Q3 (06/2007 to 09/2007).^[11] Comparatively, competitor Hershey had 28% of its annual sales in that time range.^[12]

[edit] TR invests in waste elimination and efficiency operations in response to rising corn and milk prices.

Corn for corn syrup is TR's highest volume commodity, as corn syrup is a key ingredient in their products. Milk is also an ingredient in TR products. Unfortunately for all confectionery companies, corn and milk prices have increased in the last decade. From 2006 to 2007, corn prices increased approximately 52%.^[13] and milk prices increased over 50%.^[14] TR must buy these commodities despite rising prices, and as a result total costs increased 5.3% from 2006 to 2007.

In response, TR competitively bids for commodities and buys in bulk. In 2007 $15 million of capital was invested in state of the art equipment to eliminate waste and increase manufacturing efficiency in operations.^[15] These actions could not completely stop losses to commodity costs, as gross operating profit decreased 9.9% from 2006 to 2007.^[16] Comparatively, Hershey gross operating profits decreased 6% due to Hershey's plan of transfering costs to consumers.^[17]

[edit] TR is a smaller, independent company in an industry with a large 2008 acquisition.

In April of 2008, Mars candy acquired Wrigley for $23 billion to offer an expanded product line compared to Hershey -- its biggest competitor in the confectioners business.^[18] Mars manufactures many popular candies, including M&M's, Snickers, and Skittles. Like Mars, Hershey has a name brand that sells during the most important time in the confectioners industry year -- the holiday season. With the acquisition of Wrigley, Mars offers name brand gum products. In response, Hershey wants to make similar additions to expand its product line and keep pace with Mars.^[19] Like Wrigley, TR offers products different from the standard chocolate candies, including gum, lollipops, and mints. Also, TR manufactures niche movie theater candy, including the number one selling (Junior Mint) and number two selling (Dots) products.

[edit] Competition

[edit] Confectioners

• Tootsie Roll Industries (TR)-- TR produces the number one and number two movie theater confectioner products.
• Rocky Mountain Chocolate Factory (RMCF)-- RMCF leads the confectioners industry in operating margin (24.3%) and is second in net profit margin (15.56%) to Cosan Limited (CZZ).^[20]
• Cadbury plc (CBY)--CBY leads the confectioners industry in total revenue.^[21]
• Hershey Foods (HSY)-- HSY sells chocolate products to over 90 countries.^[22]
• Wm. Wrigley Jr. Company (WWY)-- Purchased by Mars in April, WWY is first in market cap and second in total revenue in the confectioners industry.^[23]
• Imperial Sugar Company (IPSU) IPSU white, brown, and powdered sugar and molasses.^[24]
• Cosan Limited (CZZ)-- CZZ leads the confectioners industry in net profit margin.^[25]

[edit] References

1. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8
2. ↑ MarketWatch: TR
3. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8
4. ↑ Seeking Alpha, "Hershey Weighing a Sweet Deal with Tootsie, 06/26/08
5. ↑ TR 2007 10-k, Item 3: Business, page 3
6. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8
7. ↑ Yahoo! Finance, Confectioners, Leaders & Laggards
8. ↑ TR 2007 Annual Report
9. ↑ TR 10-q, Item 1: Financial Statements, page 3
10. ↑ TR 2007 Annual Report
11. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8]
12. ↑ HSY 2007 10-k, Item 6: Selected Financial Data, page 6
13. ↑ USDA, "Corn and Feed Grains"
14. ↑ USDA, "Dairy"
15. ↑ TR 2007 Annual Report
16. ↑ MarketWatch: TR
17. ↑ MarketWatch: HSY
18. ↑ New York Times, "Mars to Buy Wrigley's for $23 billion," April 28, 2008
19. ↑ Seeking Alpha, "Hershey Weighing a Sweet Deal with Tootsie," 06/26/08
20. ↑ Yahoo! Finance Confectioners Industry, Leaders & Laggards
21. ↑ Yahoo! Finance Confectioners Industry, Leaders & Laggards
22. ↑ "Hershey website, "Products"
23. ↑ Yahoo! Finance Confectioners Industry, Leaders & Laggards
24. ↑ Imperial Sugar Company website, "Products"
25. ↑ Yahoo! Finance Confectioners Industry, Leaders & Laggards
26. ↑ TR 2007 10-k, Item 6: Selected Financial Data, page 8
27. ↑ RMCF 2007 10-k, Item 6: Selected Financial Data, page 18
28. ↑ CBY 2007 20-f, Item 3: Key Information, page 2
29. ↑ HSY 2007 10-k, Item 6: Selected Financial Data, page 6
30. ↑ WWY 2007 10-k, Item 6: Selected Financial Data, page 12
31. ↑ IPSU 2007 10-k, Item 6: Selected Financial Data, page 20
32. ↑ CZZ 2007 Prospectus, Presentation of Financial and Other Information, page 33