Stock Wars: Hershey Vs. Rocky Mountain Chocolate Factory

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector with the goal of determining which company is the better investment.

This week, the duel is between a pair of leading chocolate providers: Hershey Co. HSY and Rocky Mountain Chocolate Factory, Inc. RMCF.

The Case For Hershey: This company traces its heritage back to Milton Hershey, who was apprenticed to a confectioner in 1871 when he was 14 years old. After five years, the 19-year-old Hershey — whose formal education never went beyond the fourth grade — opened his own confectionary business in Philadelphia.

Today, Hershey is headquartered in a Pennsylvania town named after the company’s founder and offers more than 90 brands created by a global workforce of roughly 17,000 employees. While chocolate is the company’s most celebrated output, it is also known for the non-chocolate snack foods and candies including SkinnyPop, Pirate’s Booty, Jolly Rancher and Ice Breakers. The company has been a fixture on the NYSE since 1927.

During the past two decades, much of the company’s growth was fueled by acquisitions, most recently with December’s completion of the $1.2 billion purchase of Dot’s Pretzels and last June’s $425 million takeover of the Lily's brand of confectionery products.

In 2016, Mondelez International Inc MDLZ sought to acquire the company, but the deal fell through.

The company was in the headlines last week when its President and CEO Michele Buck acknowledged the cost of Hershey’s products was going up this year.

"Pricing will be an important lever for us this year and is expected to drive most of our growth," Buck said during the fourth-quarter earnings call on Feb. 3, adding there will be "list price increases across all segments." Chief Financial Officer Steven Voskuil chimed in by pointing out Hershey was dealing with increased pricing for the sugar, dairy goods, specialty ingredients and packaging materials for its products and increased labor costs.

And speaking of the fourth-quarter earnings, Hershey reported consolidated net sales of $2.3 billion, up 6.4% from $2.1 billion one year earlier. The quarter’s operating profit of $459.2 million was up from $405 million in the previous year, but its reported gross margin of 43.5% was 50 basis points below the 44% of the fourth quarter of 2021, which was attributed to higher supply chain costs and lower derivative mark-to-market commodity gains. The fourth-quarter adjusted earnings per share ranged from $7.84 to $7.98.

“In 2021, we delivered a record year of production and double-digit sales and earnings growth, with a strong finish and momentum heading into 2022,” said Buck. “While the environment remains volatile, we are confident in our ability to continue to respond to the changes in the world around us and deliver another year of advantaged performance in 2022.”

Hershey shares opened for trading on Wednesday at $207.00, a hair shy of its 52-week high of $207.21 and far from its 52-week low of $143.58.

Related Link: The complete Stock Wars series

The Case For Rocky Mountain Chocolate Factory: Frank Crail was a transplanted Californian who found himself in Durango, Colorado, in 1981. He wanted to open a franchise for See’s Candies, a division of Berkshire Hathaway Inc (NYSE: BRK-A), but discovered the company did not have a franchise program. Thus, he opened a Rocky Mountain Chocolate Factory store and began to sell franchises.

By 1985, the company had grown to the point that Crail took Rocky Mountain Chocolate Factory public on the NASDAQ. The company produces approximately 300 chocolate candies and other confectionery products and operates more than 300 Rocky Mountain Chocolate Factory and U-Swirl self-serve frozen yogurt stores across the U.S., Panama, Philippines, South Korea and Qatar.

Among its recent corporate developments was the appointment of veteran retail industry executive Elisabeth Charles as chairwoman of the board of directors. This followed the decision last summer to separate the roles of board chairperson and CEO. Bryan Merryman, who has been CEO since February 2019, agreed to step down from his position upon the appointment of a successor.

The company also faced criticism from Andrew Berger, managing member of AB Value Management LLC, which owns 7.51% of its outstanding shares. Berger criticized the corporate leadership of demonstrating “poor judgment and governance practices” and initiated a proxy fight to reshape the company's board. While the company won the fight against AB, it nonetheless spent $1.7 million to swat away the challenge.

In its most recent earnings report, the third-quarter data published Jan. 13, the company recorded revenue of $8.5 million, up from $7.2 million one year earlier. But it also generated a $2 million operating loss, compared to a $400,000 net income level in the third quarter of 2021. The company attributed this decline “primarily to non-recurring costs associated with the contested director elections and compensation expenses triggered by the results of the director elections.” Its diluted loss per common share of -24 cents was a drop from the 8-cent earnings one year before.

The company did not host an earnings call to discuss the third-quarter results, nor did the press release announcement of the earnings figures include a quote from a company executive.

Rocky Mountain Chocolate Factory shares opened for trading at $8.18; its 52-week range is $4.45 to $10.36.

The Verdict: This duel isn’t even close. Rocky Mountain Chocolate Factory might produce wonderful confectionary products, but the company’s leaders need to get their act together. Besides the turmoil in the upper ranks, it is also dealing with legal challenges regarding Immaculate Confection, Ltd., operator of the company’s Canadian franchise network with more than 50 corporate and owner-operated retail stores. The parent company sued Immaculate Confection over trademark violations in March 2020. How long this situation will be allowed to metastasize is anyone’s guess.

There is also the problem with a once-promising partnership with Edible Agreements International. In its third-quarter earnings, the company reported: “certain disagreements arose between RMCF and Edible Arrangements related to the strategic alliance and ecommerce agreements resulting in continuing discussions, the result of which are not currently determinable.”

While Rocky Mountain Chocolate Factory is struggling internally, it has conspicuously failed to grow its product line and boost its name recognition via marketing promotions. In comparison, Hershey recently announced new Kit Kat flavors and an updated line-up of Valentine’s Day and Easter candies. Plus, its stock is showing great vibrancy despite the announcement that prices are going up.

Thus, this Stock Wars duel is declared in favor of Hershey, although there is the sincere hope that Rocky Mountain Chocolate Factory can accomplish a much-needed reanimation this year and offer a Hershey-worthy performance focused on confectionary and not internal squabbling.

Photo: Jacqueline Macou / Pixabay

Posted In: candychocolateconfectionaryfoodProxy fightstock warssupply chain disruptionsLong IdeasNewsOpinionTop StoriesTrading Ideas

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