Despite revenue gains, Hostess stock tanks with reduced income and outlook
- Hostess Brands reported a second-quarter net revenue spike of 6.2% to $215.85 million, compared to $203.18 million in the year-ago period, according to a company release. The company attributed this growth — which came in below analyst estimates — to the acquisition of its Chicago bakery. This contributed to $20.8 million in revenue and boosted the company's breakfast product portfolio and manufacturing capabilities.
- The baker also posted net income of $24.6 million compared to $28.2 million in the same period last year, and reduced its financial outlook for fiscal 2018 to $190 million to $200 million EBITDA from $220 to $230. The lackluster financials translated into a bad morning of trading, with shares of the baker down more than 17% in morning trading.
- Hostess blamed "escalating" inflationary pressures, including transportation and other supply chain costs, for its lackluster performance. It also claims it lost promotional support from a key retailer, though it did not name the company. “We expect sequential improvement to our margins in the second half of 2018 and as we progress into 2019, anchoring our overall growth thesis," CEO Andy Callahan said in the release. "This includes a disciplined approach to strategically align our pricing and merchandising structure, recapture display volume and ensure the efficient alignment of our distribution and manufacturing network to support our growth."
Hostess is putting a lot of stock in its Chicago bakery's potential, especially as a platform to expand its presence in the breakfast space. The new facility has already proven to be a bright spot for the manufacturer this year, and the company said it will continue to pour money into "converting the operations and processes to be more streamlined and efficient."
The baked goods giant's in-store bakery segment saw revenue climb 1.1% from $11.5 million to $11.6 million. This is an improvement from the previous period, which saw net revenue slip 3% on a shift in product and channel mix, as well as the increasing transportation costs that have plagued the larger food industry — issues that dragged gross profit from $3 million to $2.5 million during Q2.
Still, the category's turnaround could encourage the company to further invest in its in-store bakeries, which have driven incremental growth during previous quarters.
Net revenue in its Sweet Baked Goods segment jumped 6.5% to $204.2 million, compared to $191.7 million in the year-ago period. This growth was also tied to the addition of the Chicago bakery, but was partially undercut by reduced Hostess branded display volume, as well as the inventory reduction at one of the baker's biggest grocery partners.
RBC Capital analyst David Palmer identified the retailer as Walmart in a note downgrading the baker's outlook. Hostess is not alone in having problems with the megaretailer. Campbell Soup has also had similar problems with Walmart, leading to quarterly sales declines. According to The Wall Street Journal, Walmart typically generated about a fifth of Campbell's overall sales, and failure to reach an agreement on promotional pricing hurt sales.
It's unclear to what degree this changing relationship with the retailer could hurt Hostess's 2018 prospects, but the category's improvement despite this hiccup is promising.
Hostess continues to see gains thanks to its investments in its own brands, which have included ultra-indulgent innovations such as chocolate peanut butter Twinkies. The company has also worked to better align with evolving consumer demands for clean label versions of packaged sweet treats, as evidenced by its recent launch of Hostess Bakery Petites — which are free from artificial flavors, colors and high fructose corn syrup.
This simultaneous consumer demand for over-the-top sweet confections as well as products made with simpler ingredients lists and reduced processing has been tricky for the broader confection space to navigate. As long as Hostess avoids making claims that this revamped products are better-for-you, which could mislead shoppers into thinking there is a significant nutritional improvement, the company will likely continue to reap the rewards for its "cleaner" offerings.
Still, there could be a dip in its branded confection sales next quarter. The company issued a voluntary recall of its Cookies 'n Creme Brownies on Friday because they didn't alert customers to an egg allergen. “Although the ingredient list on the packaging identifies ‘egg’ as an ingredient, the “Contains” statement, which is designed to further alert consumers of allergens in the products, does not include ‘egg,’ " the company said in a news release. While mix-ups like these are fairly innocuous in the food space, Hostess must embrace transparency to maintain customer loyalty and avoid more significant labeling issues.
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