Hostess earnings are sweetened by new breakfast business
- Hostess Brands saw an increase in revenue during the last quarter, mostly attributable to its acquisition of breakfast items from Cloverhill earlier this year, according to its most recent earnings report. Hostess's overall revenue grew 9.7% to $211 million from a year earlier.
- The Cloverhill deal brought $18.9 million more in revenue to Hostess — literally all of its $18.7 million reported increase. But the specifics of the deal also dragged on the company's finances. Gross profits were down to 28.6% of net revenue, compared with 40.8% of net revenue previously. The report said Hostess has been working to transform Cloverhill into a profitable business, reducing waste and downtime and performing significant capital improvements. The company also has suffered higher transportation costs and inflation, though the report said recently announced price changes should mitigate some of these increases.
- "We are executing our proven and differentiated model that leverages our strong brands, consumer relevant innovation and collaborative customer partnerships to drive Hostess share growth and profitable category growth for our customers," Andy Callahan, Hostess's president and CEO, said in a statement.
It goes without saying that Hostess's pickup of the Cloverhill business in February was a sweet deal. While financial terms of the deal weren't disclosed, sales seem to be doing very well. Cloverhill helped give Hostess a firm foothold in the breakfast segment. So far, the report said, Hostess has launched branded cinnamon rolls and jumbo Donettes, and it plans to come out with more products at the beginning of 2019. The new breakfast business also has helped keep revenue growing at the company.
The sweet baked goods segment, which includes the Cloverhill business and iconic treats such as Twinkies, saw 10.8% net revenue growth compared with last year. And while the new breakfast brands helped, so did growth in small-format, grocery and dollar store channels.
Hostess's in-store bakery segment, on the other hand, is not doing as well. Revenues decreased $1 million — 9.3% — in the last year. The report credits the drop to a shift in product mix. And gross profits also were down, the sweet maker said, because of the mix change and higher distribution costs.
While this earnings report has neither extremely good or bad news, it's clear that the company is in a sweet spot for future growth. Grab-and-go breakfast options represent a lucrative possibility. In 2015, on-the-go breakfast products were a more than $1 billion market, according to Future Market Insights. A global survey by DSM last year found 85% of people eat breakfast daily, but a quarter spend fewer than five minutes on the meal. Almost four in five respondents said breakfast should be convenient to prepare and eat.
Hostess's prepackaged treats all feed into consumer desire for both indulgence and convenience. With the bandwidth and innovation from Cloverleaf, there is no reason why the brand, best known for Twinkies, Ho-Hos and CupCakes, can't also become as well known for breakfast pastries. And there are definitely avenues for on-trend innovation. While it may not make sense for new Hostess treats to hit the better-for-you or protein-packed trends, changing up sizes and ingredients — and perhaps dabbling into non-GMO or allergy-friendly treats — could bring the brand more sales.
In a transcript of the earnings call, Callahan emphasized the opportunity for the company and its revenues to expand in the near future.
"Our priority is to service our customers, while not sacrificing the long-term foundations for growth," he said. "This has sometimes resulted in ... extra costs in the short-term, but never at the expense of the long-term potential. We are confident that Cloverhill Business and the launch of the Hostess-brand items will be a catalyst to our growth in the breakfast segment and we remain very confident about the accretive revenue and EBITDA opportunity this platform provides in 2019 and into the future, as we continue to build out the product set and expand distribution into other channels."
Extending the breakfast treats to in-store bakeries also could provide more opportunities. As grocery stores add more to their bakeries to draw in more shoppers, indulgent treats — especially from a trusted supplier — can provide more foot traffic and bakery business.
It will also be interesting to see if the price hikes will help the baker's bottom line. According to the transcript, CFO Tom Peterson said that the list price will increase 2% next year — though Callahan said that with other impacts, it will add up to more than that. Callahan said he thinks it will not impact sales, and it may not, considering that many companies — including Mondelez, Hershey, Nestlé, Unilever and Coca-Cola — have already announced plans to increase their prices as well. However, considering that Hostess has no products that can be considered vital to healthy eating, the company should hope that consumers don't take the 2019 price increases — plus the habit of setting new year's resolutions — as an excuse to diet and cut out the brand's products altogether.
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