I believe Motley Fool Income Investor selection Wrigley (NYSE:WWY) is a truly legendary company. It sells a repeat purchase product in a market that it has a fair amount of control over, and its long-term returns to shareholders are among the very best out there.
That said, anytime a company headlines its press release with record sales and doesn't make any mention of profits in headline or subheadlines, you can be pretty sure it wasn't a great quarter. That's the case for Wrigley, but the saving grace appears to be that this is what investors were expecting.
The company's income-statement metrics are captured in our Fool by Numbers, so I'll dive into the second-quarter numbers and valuation in a bit more detail here. Without a balance sheet and a statement of cash flows, it's difficult to come to any real conclusions about the quarter, but the income statement is worthy of some discussion.
Most glaring is Wrigley's gross margins, which declined by more than 5% (500 basis points), and the hit trickled all the way down through the income statement. Of the gross margin decline, 1% (100 basis points) is explained by restructuring charges, which should be recoverable, and another 2.5% (250 basis points) is due to lower margins in some of the company's recently acquired products. The final 1.5% (150 basis points) appears to be from cost pressures and is a true concern that investors should keep an eye on. Increased interest expense for the recent acquisitions also took a bite.
While this performance was unimpressive, this is a company that has a decent amount of pricing power in some of its product lines. Considering that, it's in little long-term danger. That said, I don't find the valuation terribly attractive, because there isn't much of a margin of safety if growth ends up being slightly slower than it has been historically. The same can be said for fellow candy companies Hershey (NYSE:HSY), Rocky Mountain Chocolate Factory (NASDAQ:RMCF), and Tootsie Roll Industries (NYSE:TR). For what each can realistically achieve, none is all that cheap, but the dividends all these companies pay help make up the difference.
Wrigley shares have never been very cheap, and the company has always been able to justify its price. Until there's some kind of breakdown in the general belief about what Wrigley's capable of, I may never get a chance to own shares. It's the curse of the value investor, but one I'm willing to live with.
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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
