Dive Brief:
- Tootsie Roll Industries is in the sights of activist investor Ben Axler of New York-based Spruce Point Capital, who claims the iconic candy company resists innovation, doesn't promote its products, is financially secretive and generally poorly run, according to a research report released this week.
- Axler said in the report that Tootsie Roll's adjusted gross margin of 31% compares unfavorably with Hershey and Mondelez at 46% and 39%, respectively, and that it was "easy to see that Tootsie is running an inferior candy operation." Axler, known for urging the short selling of stock, also suggested Tootsie Roll's shares should be valued 25% to 50% lower than Wednesday's $37.20 opening price.
- Among many other accusations, Axler said that Tootsie Roll's products contain too much sugar and receive poor product placement on store shelves, and that the company inflates its gross margins and operating cash flow. "In our opinion, Tootsie is run for the benefit of insiders, while taking advantage of common shareholders through lavish compensation and excessive perks," he wrote in the report. Food Dive requested comment from the company on Axler's charges, but did not receive a response.
Dive Insight:
Spruce Point Capital has built a reputation on calling out companies it sees as overvalued — and ushering in a steep drop in stock prices. Recent targets have included iRobot, which saw a dropoff in its stock price in September, and Burlington Stores, which was cited by the investment firm last year for having "aggressive accounting" that masked underlying issues.
Spruce Point Capital's targets have been all over the map, from logistics firms to construction. The Chicago-based company that produces Tootsie Rolls, Charleston Chews, Blow Pops, Junior Mints, Sugar Daddies, and Andes Candies, among others, is the only recent food company in its crosshairs. Tootsie Roll was established in 1896. Its CEO and chairman is Ellen Gordon, the widow of former CEO Melvin Gordon, who died in 2015. According to Forbes, Gordon and her four daughters together own 60% of the company.
Tootsie Roll Industries has been valued at $2.3 billion, although Axler said large companies interested in such an acquisition — Nestle, Mondelez International and Hersey have been named — wouldn't be likely to offer more than Tootsie Roll's market capitalization of $2 billion, which is 20 times its 2018 estimated cash flow and 40 times its earnings.
Sales of Tootsie Roll's products have reportedly been flat for six years and are dropping internationally. Figures from recent earnings reports have been pretty much unchanged as well. The company's second-quarter earnings report released July 26 showed net sales of about $104.9 million, which were up $638,000 over the same period in 2016. Net earnings were about $11.9 million, compared to about $11.1 million in the year-ago period. Net earnings per share were 19 cents, for an increase of 2 cents over the second quarter of last year.
Tootsie Roll Industries has been criticized for only having four board members who, at an average age of 72, are the 12th-oldest group of directors among the S&P 1000 companies, according to Bloomberg. Gordon herself is in her mid-80s, and her husband, who never retired, was 95 when he died.
According to a Chicago Tribune story, the Gordons have always prized the company's independence and have kept buyers at bay for many years. Will the family's policies continue despite Tootsie Roll's recent targeting? It's difficult to say, considering that critical reports from Spruce Point Capital tend to have a wide ripple effect. The confectioner's stock price dropped after the report came out Wednesday morning, sinking to $36.15 in less than an hour after the markets opened. In early trading on Thursday, the price was slightly higher, at $36.20.