Last night, Tootsie reported sales of $182.2m. Looking back at historical Q3 results (an important quarter given halloween sales) we find that Tootsie had its lowest sales result in a decade
Even worse, the sales decline translated into earnings de-leveraging. Management gave a cryptic explanation:
"Third quarter and nine months 2017 net sales were adversely affected by the timing of certain customer pre-Halloween sales during the third and fourth quarters in the comparative 2017 and 2016 periods. Although higher ingredient costs and increased freight and delivery expenses adversely impacted third quarter and nine months 2017 results, continuing improvements in manufacturing plant efficiencies driven by capital investments and ongoing cost containment programs mitigated some of these higher costs and expenses"
The bulls continue to think Tootsie is a takeover target, yet it is not clear who would want to buy a company with declining sales and losing market share. The Company continues its policy of declining to comment to investors or provide a roadmap or succession plan.
At the moment, the only buyer of Tootsie is the Company which needs to stem its net income decline to bolster EPS. At nearly 4x sales and 19x EBITDA Tootsie continues to be richly valued by investors for no apparent reason. We believe a near term catalyst is the outcome of Nestle's intended sale of its North American Confectionery business, which has yet to be sold since announcing intentions to sell in June. The rumor was the asset could fetch $3bn (implying 3.3x sales), but with no buyers emerging yet, there remains a big risk of a large valuation reset for industry valuations. Strategic buyers need top-line or international growth, but Tootsie offers them neither one.
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Disclosure: I am/we are short TR.