This candy manufacturer's products have been part of American culture for generations. Its namesake, the chewy, chocolatey Tootsie Roll, has been around for more than 120 years. As we head into the third quarter, its largest sales quarter of the year -- which the company attributes to the Halloween season -- here's a look at the company as a potential long-term investment.

Tootsie Roll Industries, Inc. (NYSE:TR) employs 2,000 people and sells its products primarily in the United States, Canada, and Mexico through displays at retail outlets. Most are familiar with its candies, which include favorites such as Tootsie Pops, Child's Play, Charms, Dots, Junior Mints, Sugar Daddy, Sugar Babies, and Tootsie Rolls. 

Tootsie Roll wrapped and unwrapped.

Image source: Pixabay.

Sales are declining

A quick look at Tootsie Roll's top line shows a company whose revenue has been virtually flat or in gradual decline for the past four years.

Metric 2016 2015 2014 2013
Revenue $521 million $540 million $544 million $543 million

Data source: Tootsie Roll. 

The company is fighting two major headwinds in terms of society becoming more conscious about eating sugar and a general trend away from brick-and-mortar shopping to online shopping. Both factors appear to be negatively impacting the company's sales.

Frowning on sugar

Sugar has been getting a bad rap lately and for good reason. It has been deemed a primary cause of obesity and heart disease.

Here is what Americans saw in USA Today in January of 2016.

The 2015-2020 Dietary Guidelines for Americans recommends limiting the amount of added sugars in our diet to no more than 10% of daily calories. That's about 12 teaspoons of sugar a day. To put that in perspective, a can of Coke contains nearly 10 teaspoons.

Tootsie Roll's products are laden with sugar, so much so that moves in the price of the commodity can have adverse effects on the company's earnings. The company advises investors that it tries to protect itself against rising prices for commodities such as sugar and corn syrup by purchasing derivatives, however, as has been noted in its last three quarterly reports, that does not always solve the problem.

Tootsie Roll notes in its annual report under "risk factors" that "failure to adequately anticipate and react to changing demographics, consumer trends, consumer health concerns and product preferences, including product ingredients, could have an adverse impact on the Company's results of operations and financial condition."

Euromonitor International reported last year that "demand for 'healthy indulgence' has limited volume sales of chocolate confectionery" and it also noted pending packaging rules in the U.S. that will make sugar content more visible to consumers. "[R]etail volume sales are expected to stagnate in chocolate confectionery, falling slightly from 2016 to 2021," it wrote.

Brick-and-mortar retail is not the place to be

The migration of shoppers from the mall to online is a trend that is not going to reverse itself anytime soon. Tootsie Roll's entire sales strategy is focused on the past. Its largest customer, Wal-Mart Stores, was responsible for over 23% of its annual revenue for each of the past three years. This puts Tootsie Roll in the unenviable position of relying on the largest brick-and-mortar store in the country as its greatest source of revenue. Comparable-store sales at Wal-Mart rose just 1.4% in the first quarter. 

Some cause for optimism

The company has been reducing its costs, and as a result its profits have been rising slowly even as sales decline. This, coupled with share buybacks, has resulted in higher earnings per share. The company has also been a consistent dividend payer. The current annual dividend of $0.36 per share offers a yield of just over 1% at the current stock price.

Metric 2016 2015 2014 2013 2012
Net earnings $67.5 million $66.1 million $63.3 million $60.1 million $52.0 million
Average share count 62.239 million 63.256 million 64.173 million 65.010 million 65.859 million 
EPS* $1.08 $1.04 $0.99 $0.94 $0.79

*Per common share data and average shares outstanding adjusted for annual 3% dividend. Data source: Tootsie Roll.

Tootsie Roll's focus to increase profits in the face of declining sales by reducing costs can only take the company so far. Unfortunately there has been little in the way of introducing healthier snacks or adapting to a business model that effectively transitions its products to become more attractive to millennials or internet shoppers.

Without increasing sales Tootsie Roll has limited potential.

Investing in a family-owned business

If you're hankering for some Tootsie Roll in your portfolio, there is one last thing you need to consider. This is a family-owned business with two classes of stock. The Gordon family has run the company since 1962 and has the power to easily outvote owners of the common shares. Tootsie Roll does not hold quarterly conference calls and shareholder transparency has never been one of management's core principles. 

If you choose to invest, do so with eyes wide open as this company appears quite set in its ways.

Frank DiPietro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.