Dive Brief:
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Hostess Brands reported a 2% decline in net revenue to $192.3 million, compared to $196.2 million for the third quarter of last year. Net income dropped to $16.1 million from $26.3 million. The company said in a statement that while its brands remain strong, revenue dropped due to a difficult year-over-year comparison from 2016, product supply issues from a co-manufacturer and point of sale and shipment disruption from hurricanes Harvey and Irma.
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The company's top seven brands point of sale increased 7.7%, Hostess said, with those brands representing 73% of the company's net revenue. Market share year-to-date through October 7 was 17.2%, up 0.67% from the previous year. In-store bakery net revenue grew 5.8%.
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“We had solid underlying growth across our major brands in the third quarter, along with significant revenue contributions from 2017 innovation,” Bill Toler, president and CEO, said in a statement. “We have entered the fourth quarter with strong top-line momentum, an improving category in sweet baked goods and robust product innovation."
Dive Insight:
Driving sales during the third quarter were product initiatives such as Chocolate Cake Twinkies, White Fudge Ding Dongs and Golden CupCakes, Hostess said. However, some of that gain was offset by a decrease in net revenue from 2016 product innovations, the impact of a co-manufacturer's production challenges of approximately $3.2 million, and a decrease in revenue from discontinued items of $2.2 million.
Toler announced last month he would retire as president and CEO in March, or sooner if a replacement can be found. Toler's leadership helped reposition the well-known maker of Ding Dongs, Ho Hos and Twinkies after it emerged from liquidation in 2013 through a private-equity purchase and a return to the stock market last fall.
He has overseen increases in Hostess sales and profits, expanded its distribution network and pioneered new innovations using its own brands such as Twinkie-flavored ice cream. This has helped Hostess stretch its brand footprint across the grocery store. According to Nielsen, Hostess is the second leading brand by market share in the sweet baked goods category, holding 17.5% of the market for the second quarter of 2017.
Just this year, the company’s innovations have included cinnamon sugar crunch Donettes, white fudge Ding Dongs, chocolate peanut butter Twinkies, chocolate cake Twinkies, Golden CupCakes and peanut butter Ho Hos. The company has also introduced or announced plans for a Twinkies Cappuccino for the convenience store channel and a line of collaborative ice cream products under the Hostess brand.
The iconic brand is doing its best to innovate while still focusing on its well-known core products. The company has succeeded in boosting demand for its popular brands even as consumers gravitate toward healthier, less-surgery snacks. Shoppers still want to indulge, and Hostess is ideally positioned with its roster of sweets. It's also wisely increased its presence in the in-store bakery, food service and international distribution.
Last year, Hostess purchased in-store baker Superior Cake Products. Any future M&A initiatives would need to deliver Hostess distinct advantages, which Toler has described previously as leveraging the brand and/or warehouse model; expanding baking capabilities, including further into the in-store bakery space; building scale for the company as a broader snacking platform; and providing additional cash flow and earnings per share. The company has done a nice job leveraging its brands, but further acquisitions would give Hostess a bigger platform for grow while allowing it to expand those newly purchased products into new areas.