Chattem says consumers are regaining confidence and the firm is shifting resources away from promotions in favor of advertising to drive top-line growth in 2010.

In fiscal 2009, Chattem has "tilted a little bit from advertising toward promotion, as we responded to retailers' needs," but "we are next year going to be tilting a little more toward advertising," said President and Chief Operating Officer Bob Bosworth Oct. 6 during the firm's third-quarter earnings call.

Third-quarter results showed sluggish revenue growth but strong profits, reflecting the emphasis on promotions and lower spending on advertising in 2009.

The strategy took a toll on total revenue, which increased only 2.9 percent to $115.2 million in the quarter. Net income in the June-August period was $23.4 million, up 67 percent from the year-ago quarter.

Bosworth explained the Chattanooga, Tenn.-based firm will increase advertising dollars next year in part because after "prolonged negotiations" about upfront media commitments, "we saw single-digit decline in the cost of the media and we also got greater primetime exposure, which increases the reach and effectiveness of our advertising."

In addition, "a number of our competitors seem to have significantly cut back on media investment, which have made our media investments work harder and harder," Bosworth said.

The firm also will boost advertising because "in the promotion world, we haven't seen significant growth or pressure to go beyond where we went this year," he said. "In fact, in some cases we've seen it going the other direction."

Bosworth said Chattem encountered "an interesting phenomenon" earlier this year when a retailer refused its offer to fund an in-store price reduction.

"I think it is indicative of the fact the trends have moderated" and consumers feel better about the sales environment, he added.

Focus On New And Larger Brands

Chattem will invest more advertising dollars in new products and well-established, large brands, such as promoting ACT "strongly" to increase awareness of the mouthwash line versus competitors, said CEO Zan Guerry.

Guerry said he is not worried about short-changing advertising for smaller brands by focusing on larger brands because Chattem's smaller lines are category leaders.

The firm expects the ad boost will increase "significant incremental shelf space" and market share, he added.

Bosworth noted Chattem's renewed focus on advertising does not mean it will neglect promotions, which helped the firm increase its bottom line during the first three quarters of fiscal 2009 despite the challenging economy.

Bosworth said promotional expenses are reflected in the revenue reduction and not in advertising and promotion expenses, which fell to 19.8 percent of total revenue, or $22.9 million during the quarter.

William Blair & Co. analysts note Chattem's advertising in an Oct. 7 research note, saying the firm's "longer term" outlook is strong.

"We continue to like the Chattem story based on the company's unique combination of attractive target (OTC healthcare) markets, leading (...advertising responsive) consumer brands and earnings upside aided by acquisitions," the analysts say.

Chattem said a decline in international sales - due to the weak economy and a change of distributors in Latin America - also slowed its revenue growth (¹ Also see "Chattem Sales Slowed By Price Pressures, International Issues" - Pink Sheet, 14 September, 2009.).

Still, Bosworth said the quarter demonstrated "a strong performance in this economy."

Chattem reaffirmed its 2009 earnings-per-share guidance to grow 13 percent to the range of $4.54 to $4.64 while stating it projects 10 percent EPS growth in fiscal 2010.

Sales of topical pain care products, including Icy Hot , and oral care products, including ACT, each grew 8 percent in the quarter with sales of $26 million and $17 million, respectively.

Dietary supplement sales grew 4 percent to $5.1 million in the quarter. Internal OTCs and medicated dandruff shampoos did not fare as well, dropping 7 percent to $11.3 million and 6 percent to $7.2 million, respectively.

- Elizabeth Crawford ( ² e.crawford@elsevier.com )

Third year of "Life...": The Council for Responsible Nutrition's "Life...supplemented" campaign will run for a third year after the program managed by CRN's educational foundation reached its campaign budget goal of $1 million, the trade group says Oct. 1. The campaign, supported by 25 firms, urges consumers to assess their level of wellness by focusing on healthy diet, supplements and exercise. CRN also said the campaign's Healthcare Professionals Impact Study this year focuses on registered dieticians, nurse practitioners and pharmacists, with input on their personal use of and recommendations for dietary supplements. ... Educational grant: To educate health care professionals, CRN provides a grant to Drug Store News Continuing Education program, which allows retail pharmacists and pharmacy technicians to receive continuing education credits from Webinars. The trade group notes a CRN survey showed nearly 40 percent of consumers cite pharmacists as a reliable source of information about supplements. CRN's educational foundation also promotes truthful advertising and rigorous research (³ 'The Tan Sheet' May 25, 2009).

FTC comes down on caffeinated alcohol: Following a public comment period, the Federal Trade Commission approves a final consent order related to Constellation Brands' caffeinated alcohol drink Wide Eye . The Victor, N.Y.-based company agreed to settle the commission's allegations that advertising for the beverage was "deceptive, unsubstantiated and in violation of federal law." In online ads and Web videos, the alcohol marketer claimed the product helped people remain alert while consuming alcohol.

Chattem To Focus On Ads To Boost Top Line As Consumer Confidence Grows

More from Archive

More from Pink Sheet