Chocolate, Not Diamonds Are Forever: The Hershey Company (HSY)

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Valentine’s Day has recently passed and the staple gifts like chocolates, flowers, jewelry, and cards were purchased in extremely large quantities around the world.  Average annual Valentine’s Day spending in fact is now over $13 billion annually.  Imagine how much junk food, soon-to-be dead plants, unworn necklaces and bracelets, and recycled paper that much money can buy.  Actually don’t.  Instead realize that no matter how many commercials you see on TV of men coming up with creative ways to drop months of salary on a tiny rock that is usually over a billion years old to give to their future wives, chocolate is forever, not diamonds.

The Hershey Company (NYSE:HSY)Life is Like A Box of Chocolates

You never know what you will get for Valentine’s Day or any other holiday celebration where you exchange gifts, but I’m willing to bet that chocolate is a lot more attainable in the minds and wallets for far more people than diamond jewelry.  Latest statistics show that based on gifts given on Valentine’s Day alone, candy (which includes chocolate) is given 47.5% of the time.  Jewelry (which includes diamonds) is given only 17.3% of the time.  However, this chocolate purchasing trend is definitely not exclusive to Valentine’s Day.  Easter actually hops over Valentine’s Day in terms of pounds of chocolate sold and Halloween beats both!  For these reasons, and more below, I feel a chocolate company like The Hershey Company (NYSE:HSY) is the superior buy when compared to a jewelry retailer like Tiffany & Co. (NYSE:TIF).

In the past 5 years, Tiffany has gone up in share price over 68% while Hershey soared over 124%, not including dividends.  There are many reasons why this happened.  Starting with Tiffany, problems like sales growth, innovation, lower-priced competitors, economic slowdown, brand dilution, and alternatives have plagued the company.  Quarterly net income for the retailer has been on a decline on a year-over-year basis recently.  Being historically a very seasonal company in terms of sales, one should expect the growth to occur in the winter months around Christmas and New Year’s.  However, for the US division, which makes up half of all their revenue, the segment recently performed poorly pushing total revenue up only 4% in November and December for 2012.  Profit margins have been in the single digit range recently as well after seeing double digit values for much of 2010 and all of 2011.

Speaking of alternatives, Tiffany is fighting back at those ‘alternatives’.  They are now suing Costco Wholesale Corporation (NASDAQ:COST) over counterfeit jewelry sales that were advertised as Tiffany jewelry.  This lawsuit in some ways shows how out-of-touch Tiffany is with reality.  Tiffany was quoted as saying they “would never sell its fine jewelry through an off-price warehouse retailer like Costco.”  So much for making friends or possible partnerships in the future to increase sales.  Companies whose net earnings are decreasing 30% on a quarterly basis and nearly 10% on a year-to-date basis shouldn’t be so quick at burning bridges.

52% of US adults can’t all be wrong when they vote chocolate as their favorite flavor.  Hershey stock shows the trend is real and spectacular with their 2012 4th quarter beating estimates and increasing 2013 outlook driven by volume.  4th quarter and full-year 2012 net sales increased 11.7% and 9.3%, respectively.  2013 net sales are expected to grow 5-7% along with increased margins due to improvements in productivity and cost savings.  Where Tiffany lacks creativity, Hershey is all about innovation, putting chocolate on and in anything and everything, changing designs of classic brands, and creating all new varieties.  Kit Kat mini’s, Twizzlers Bites, Hershey Kisses Deluxe, and Jolly Rancher Bites are some of the changes proposed in the near future.  Whether they are capitalizing on the fitness trends and reducing portion sizes or just adding more to the already powerful arsenal of candy and chocolates, Hershey in my opinion is only going to go higher from here.

TIF Total Return Price data by YCharts

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