When I dove into Topps' (NASDAQ:TOPP) financials last July, I cautioned that its stock would likely remain topped out until sales got in gear. Since that time, Topps continues to strike out on its top line, and its stock has slumped more than 25%. Investors hoping for relief in its latest quarterly results will be disappointed.
The company continues to struggle to improve sales growth, largely in its confectionary unit, which saw revenues decline 5.5%. The weakness in candy sales isn't just a problem for Topps. Tootsie Roll (NYSE:TR), when you back out the revenues from its Concord Confections acquisition, actually saw sales decline by a little more than 4% in the latest period .
It's unlikely that kids have stopped munching on candy all of a sudden, but it's possible that they're tired of eating the same old sweets. Premium enterprises such as Wrigley (NYSE:WWY) and Hershey (NYSE:HSY), for example, consistently introduce new and enticing products that enable them to buck the trend with decent growth. Topps does expect its confectionary sales to pick back up in the fourth quarter with the introduction of new products it describes as "innovative."
Lagging sales growth of a meager 3.6% leading to a gross margin decline of 12.8 percentage points, and the addition of an after-tax loss of $3.7 million for the discontinuation of its Internet venture thePit.com, had the combined effect of a $3.7 million loss for the quarter versus a gain of $2.8 million the same time last year.
Amidst the doom and gloom, management expressed some optimism for next year. Topps is currently working to streamline operations and reduce costs companywide (thePit.com discontinuation is one example). Confectionary product development continues in an effort to spur future sales. Additionally, Topps has successfully lobbied Major League Baseball to reduce the number of licensees from four to two, thereby increasing market-share opportunities for Topps. Add in an aggressive share buyback program, with a commitment to repurchase half a million shares per quarter in 2007, and we should see steady earnings-per-share increases next fiscal year.
There's a lot to dislike about the company's recent performance. But an enterprise of buying back chunks of what it considers undervalued shares, combined with initiatives in place to attempt a turnaround, may provide some much-needed relief for this stock. That may be enough to attract some buyers, but this Fool is looking for sustainable and accelerating top-line growth before considering an investment in Topps.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
