Trick-or-Treating for Cash

It's that time of year again. It's time for crisp, cool autumn weather to usher in the changing of the leaves in New England. It's time to crown a new World Series champion -- congratulations to the Boston Red Sox! And, of course, its time for hordes of ghosts, witches, and other costumed revelers to rove the streets in search of Kit-Kats, Snickers, M&Ms, and any other sugar-filled delights they can greedily stockpile in their trick-or-treat bags.

Halloween: the next Christmas?
October has become a boon to retailers -- trailing only November and December in total sales volume -- and provides an important link between back-to-school shopping and the traditional winter holiday season. The one-time children's holiday has grown increasingly popular with adults, who will attend more parties for Halloween than any other occasion except New Year's Eve and Super Bowl Sunday. Sales statistics bear out this trend, as the National Retail Federation (NRF) reports that Halloween spending has nearly tripled from $2.5 billion to $7 billion in the past six years, and trails only Christmas in retail holiday spending.

Among the principal recipients of this trend are confectioners, who are salivating at the prospect of supplying the nation's youth (and grown-ups) with enough candy, chocolate, and gum to keep them happily chomping until mid-November. Candy purveyors have grown accustomed to a spike in demand around Halloween, and last year collectively raked in $1.98 billion in holiday sales. About one-fourth of all candy sold domestically will be bought in a two-month span between mid-September and mid-November, and according to the NRF, consumers are expected to shell out over $2 billion for Halloween candy this year. So which companies can expect to scare up some monstrous profits?

Obviously, retailers everywhere share in the pie, with many discounting heavily to drive increased store traffic. A sales summary from the National Confectioners Association reported that Wal-Mart (NYSE:WMT) led the way last year, with a 4% rise in Halloween candy sales. Retail drug stores like Walgreen (NYSE:WAG) also saw their candy inventory disappear from shelves, as did convenience stores (representing one-third of last year's sales), and specialty party outlets like Party City (NASDAQ:PCTY).

The real Willy Wonkas
But what about the candy producers themselves? Surprisingly, there are few publicly traded options to choose from. Hershey (NYSE:HSY) is the 800-pound gorilla of the industry, dominating over 40% of the domestic chocolate market, with a double-digit lead over the nearest competitor, privately owned Mars. According to Morningstar, Hershey's 30% candy market share equals that of its three largest rivals combined. Here's a quick snapshot of some of the bigger players:

*Sales and market cap figures in millions; P/E, EPS, and sales based on trailing-12-month figures

The average person consumes about 24 pounds of candy annually (half of it chocolate), spending around $85 in the process, and these companies lead the charge in ensuring that demand is met. A healthy (or is it unhealthy?) percentage of that will be eaten the night of October 31, when an estimated 85% of U.S. households will participate by handing out candy. Chocolate remains a perennial favorite choice, and in fact, each of the top five favorite holiday brands -- Snickers, Reese's, Kit-Kat, Milky Way, and M&M's -- is coated in it. This preference was likely reflected in Hershey's recent third-quarter results, which showed a 16% jump in earnings on sales that rose 5% to $1.25 billion.

Fortunately, the health benefits of these tasty treats are indisputable... well, sort of. But medical researchers recently discovered that natural antioxidants found in chocolate can actually improve cardiovascular health, and most people overlook the fact that one chocolate bar contains 15% of the recommended daily allowance of riboflavin.

Chocolate won't have a complete monopoly, though, as Brach's is forecasting that 2 billion kernels of candy corn will be purchased this month. The Halloween favorite is celebrating its 100th anniversary this year, and it is estimated that over 20 million pounds will be consumed. Products from Tootsie Roll (NYSE:TR), the world's largest lollipop maker, and gum from Wm. Wrigley will also find their way into the goody sacks of little pirates, princesses, and Harry Potters everywhere.

Sweeping health-conscious trends are also expected to make an impact. Before, kids only had to be wary of the dreaded apple or box of raisins, but now a whole new crop of non-junk junk food is available. Despite representing a tiny 3% of the market, diet candy (whether low-carb, low-calorie, or sugar-free) has seen a 90% surge in sales over the past 12 months.

Would you like spiders with that?
Skeletons, vampires, or ax-wielding psychos might be frightening to some, but investors might find the next tidbit more spine-tingling. While consumers continue to purchase pumpkins, party supplies, costumes, decorations, and greeting cards in record numbers, candy volumes (full-year, not just Halloween) have flatlined over the past five years. To help combat the problem, innovative products are continually rolled out to consumers, particularly around Halloween.

Fortunately, retailers can cash in on other trends. The NRF estimates that the average consumer will spend about $43 on Halloween merchandise this year, with sweets only representing $15. Obviously, costumes will again be a big revenue driver, with over half of the country paying to transform into werewolves, TV characters, or naughty nurses (click here for a list of this year's top choices). Interestingly, nearly one in five consumers surveyed by the Macerich Co. plans to purchase a costume for their pet -- good news for pet stores like PETsMART (NASDAQ:PETM).

Decorating the home with everything from inexpensive cobwebs to glow-in-the-dark mummies has become an increasingly popular practice, with well over $500 million spent on decorations last year (second only to Christmas). Sales of Halloween merchandise are expected to grow by 5.5% this year, as nearly two-thirds of those surveyed indicated that they have some type of decorating plans.

Let's not forget one of the most enduring of Halloween rituals -- scaring ourselves senseless by watching horror movies. Many will make trips to their neighborhood Blockbuster or update their Netflix (NASDAQ:NFLX) queue to request their blood-splashed favorites. Scream, The Exorcist, and Halloween have been listed as the top three choices, though I've been partial to the Friday the 13th series. Others prefer to face their fear in company -- Sony's Sarah Michelle Gellar fright flick The Grudge opened in the top box-office spot, raking in nearly $40 million its opening weekend.

Decorations are nice, and pumpkins have their place, but above all Halloween is associated with candy (at least to the sweet-toothed it is). Confectioners rely on seasonal sales for over one-third of their annual revenues, and no other season is as vital for the success of the $24 billion market. A slow season could have manufacturers as dissatisfied as Charlie Brown was with his Halloween haul when all he got was a rock. But if the solid growth this holiday's been experiencing keeps up, kids won't be the only ones smiling after Halloween night.

All candy is not created equal; neither are all mutual funds. For the inside scoop on some of the sweetest around, sample Motley Fool's Champion Funds newsletter.

Fool contributor Nathan Slaughter is still undecided on this weekend's costume, but will enjoy some Hershey's Special Dark while he decides. He owns none of the companies mentioned. The Motley Fool is investors writing for investors.