Tootsie Roll's Earnings Show Resilience Amid Sales Slump

Tootsie Roll Industries (TR) reported its first-quarter 2025 earnings this week, delivering a mixed bag of results that underscore the confectionery giant’s ability to navigate inflationary pressures—but also highlight vulnerabilities tied to rising input costs and consumer price sensitivity. Let’s break down what investors need to know.

The Contradiction: EPS Up, Sales Down

Tootsie Roll’s net sales fell 3.3% year-over-year to $146.5 million, as customers resisted the company’s efforts to raise prices to offset soaring costs for cocoa and chocolate. Yet net earnings surged 14% to $18.1 million, while earnings per share (EPS) jumped to $0.25, a 14% improvement from $0.22 in the same period last year.

The key takeaway: Tootsie Roll is managing its costs and capitalizing on non-core gains, but its core business is under strain.

What’s Driving the Earnings Growth?

1. Operational Efficiency Gains: The company cited improved price realization and manufacturing efficiencies, which boosted gross profit margins. Even with cocoa prices elevated, better cost management and plant optimization helped.
2. Financial Engineering: A reduction in average shares outstanding (to 72.96 million from 73.54 million) due to share repurchases amplified EPS.
3. Non-Core Gains: Increased investment income from marketable securities and an unspecified insurance recovery added to net earnings.

The Elephant in the Room: Cocoa Costs and LIFO Accounting

While earnings rose, Tootsie Roll faces headwinds that could limit future growth. Cocoa and chocolate costs remain significantly elevated, and older, cheaper supply contracts are expiring, replacing them with costlier agreements. This is a double-edged sword:
- LIFO Accounting: The company uses LIFO to account for inventory, which means rising input costs are reflected in current expenses. This artificially depresses reported earnings but reflects the true cost of goods sold.
- Consumer Pushback: Tootsie Roll’s attempts to raise prices have led to lower sales volumes, as households remain sensitive to inflation.

The Bigger Picture: Seasonality and Strategy

The Q1 sales decline isn’t entirely surprising. The confectionery sector typically sees weaker demand in early months, with holiday sales driving Q4 results. However, the 3% sales drop is still a concern.

Looking ahead, Tootsie Roll’s focus on operational investments—like plant upgrades and capacity expansion—could pay dividends. But management must balance these costs against the rising price of raw materials and the risk of tariffs disrupting supply chains.

Investor Takeaways

• Value Play or Caution?: At current levels, Tootsie Roll’s stock trades at around 15x forward earnings, which is reasonable for a stable, dividend-paying company (yield: ~1.8%). But investors should weigh this against the risks.
• Key Risks: Cocoa prices, LIFO impacts, and tariffs could all squeeze margins. If input costs outpace price hikes, sales could continue to decline.
• Long-Term Bet: Tootsie Roll’s legacy brands (e.g., Tootsie Rolls, Junior Mints) have enduring appeal. If the company can stabilize margins through efficiency and strategic pricing, it could remain a defensive play in a volatile market.

Conclusion

Tootsie Roll’s Q1 results are a reminder of the challenges facing traditional consumer goods companies in an inflationary environment. While the company’s cost controls and financial engineering delivered EPS growth, the sales slump and looming cocoa cost pressures suggest caution is warranted.

Investors should monitor two critical metrics:
1. Cocoa Price Trends: Cocoa futures are up ~10% YTD, and if they keep rising, Tootsie Roll’s margins could face further strain.
2. LIFO Impact: The company’s use of LIFO means reported earnings may understate the true cost of inflation—something to watch in future quarters.

For now, Tootsie Roll remains a hold—a stock that offers stability but lacks catalysts for significant upside. The path to growth hinges on whether the company can weather the input cost storm without sacrificing market share.

Data Note: Tootsie Roll’s stock price has declined ~5% YTD, underperforming the S&P 500. Investors may want to pair this with a visual of TR’s stock performance relative to peers like Hershey (HSY) or Mondelez (MDLZ).