Chocolate, Not Diamonds Are Forever
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
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.
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 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.
Flowers, like chocolate, are bought throughout the year and the biggest sales day is also not Valentine’s Day, even though 196 million roses are currently produced for the day of love. Christmas and Mother’s Day, take the top 2 spots with 30% and 24% of all flower sales annually, respectively. Cards usually take the top spot for all holiday occasions, and Valentine’s Day is no exception with 52.1% of all gifts given for the day being cards. In terms of publicly traded stocks, the selection is limited with 1-800-Flowers (NASDAQ: FLWS) and American Greetings Corporation (NYSE: AM) representing both categories. I call both of these stocks ‘wild cards’ because the stocks have performed overall mediocre at best, the potential is always there based on society’s trends, and I’m a Hallmark guy.
1-800 Flowers represents the best of the best when it comes to seasonal stocks. Net income swings up and down every other quarter, and every 4th quarter (Oct-Dec) they see a big jump in sales. The major problem with this, and what has played a big part in the share price dropping by half the last 5 years, is that the 4th quarter does not make up for the first 3 lousy quarters. The average quarterly net income for the company is -$3 million the last 5 years of quarters. Like net income, profit margins follow the same patterns of fluctuation. This leads me to believe there is a problem with the business model and not the products. Something is wrong with the hiring or overhead and I’m guessing that over 75% of the time, the cash is being burned away on payrolls and dead flowers.
One of the positives 1-800-Flowers has going for it are the constant around the clock advertising partnerships they have with some of the biggest radios shows today including many on ESPN. It is a great strategy in targeting one of the largest male audiences around and maintaining the brand. Their most recent earnings results show revenues grew 5.5% to $253 million with expected growth in all 3 of their business segments for 2013. The growth was primarily due to progress in the Gourmet Food and Gift Baskets segment. This leads me to believe the company should change their name a la Research in Motion because even though I have heard a 1-800-Flowers commercial every day the past month, I had no clue they sold gourmet food, baskets, chocolate, and popcorn until I read through their earnings release.
American Greetings is only marginally better as a stock with their consistently growing dividend that is now 3.6%. This is good because the stock has basically done nothing the past decade otherwise. One would think that with the ridiculous prices for many cards these days, margins would be astronomical. However, the past 5 years of quarterly results for American Greetings show an average of 0.43% per quarter.
Statistically, 80% of cards are purchased by women. For Valentine’s Day the value goes up to 85%. It makes one wonder if men are sending chocolates and flowers with Post-It notes attached. Nevertheless, these statistics favor American Greetings because from what I’ve seen when it comes to gift-giving, women are far more consistent and reliable on gifts than men. One thing to consider when looking at this stock though is that in mid-January the founders were debating on taking the company private. This could help the company go up in the coming months on speculation and this makes this stock a true wild card.
Yes, diamonds are still the preferred choice of jewelry and everyday thousands of diamond rings and other jewelry are exchanged between couples. However, far more chocolate is bought and the future looks far better for a company like Hershey than any of the dozens of jewelry stocks like Tiffany & Co. As for flowers or cards, it appears companies like American Greetings is the better buy. With the growing laziness in the gift-giving world it seems like gift cards and greeting cards go together like lock and key. In the end, it just comes down to common sense. Make a list of occasions, celebrations, and special events in your life. Ask yourself how often you receive diamonds, chocolate, flowers, or cards. I don’t know any ‘Get Well’ or “It’s a Baby” occasions accompanied by a princess cut diamond.
mikecart1 has no position in any stocks mentioned. The Motley Fool owns shares of American Greetings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!