Despite reassurances from Hostess Brands’ top executives that lower third-quarter earnings and sales were largely in line with company expectations, the share price at the Kansas City-based baker fell to a 52-week low of $11 per share on Nov. 8.
Hostess net income in the third quarter ended Sept. 30 was $9,549,000, equal to 10c per share on the common stock, compared with $31,184,000 of income for the predecessor company in the third quarter of 2016. Sales were $192,250,000, down 2.1% from $196,197,000 in third-quarter sales last year. The predecessor figures refer to results of Hostess Holdings L.P. before its November 2016 acquisition by Gores Holdings, Inc. (the combined business was subsequently renamed Hostess Brands, Inc.).
Pro forma net income for Hostess in the third quarter was $16,130,000, equal to 10c per share on the common stock, down 39% from pro forma net income of $26,282,000, or 18c per share, in the third quarter of 2016.
After starting fiscal 2017 on a high note, Hostess anticipated less growth during the second and third quarters, William D. Toler, president and chief executive officer, said during a Nov. 8 conference call with analysts. What the company didn’t anticipate during the third quarter were two major issues.
“First, we had product supply issues from a co-packer we work with on a few of our items,” Mr. Toler explained. “While co-packed products overall are a small part of our business, the impact was over $3 million in revenue for the quarter. We have secured production from other co-packers for the majority of this affected product, and this disruption is largely behind us.
“The second impact was some of the disruption was caused by Hurricanes Harvey and Irma, which caused thousands of stores to be closed for some period of time and disrupted transportation and logistics during the quarter. As you have heard from many food companies, these disruptions were meaningful, and our transportation costs increased significantly as the industry is recovering from these events.”
As a result of the co-pack challenges, hurricanes and higher transportation costs, Mr. Toler said Hostess has revised its full-year revenue guidance to a range of $775 million to $781 million, down from a single number of $781 million. The company also has revised its EBITDA guidance from the $235 million single number it had been using to a range of $230 million to $233 million.
Adjusted EBITDA in the third quarter was $54.7 million, down from $55.6 million in the third quarter last year. The EBITDA margin was 28.4% of revenue, unchanged from the year before.
Heading into fiscal 2018 Hostess remains focused on three growth drivers: rebuilding the core, innovation and line extensions, and whitespace opportunities.
In terms of rebuilding its core, Hostess has been gaining distribution with the majority of its retailers, Mr. Toler said, adding that the company has been filling voids, adding items count and getting more shelf space.
“We’ve added an average of 1.7 items on the shelf, bringing our average count to the retailers to 21.8 items year-to-date,” he said.
Hostess also has been leading the way with innovative new product launches.
“We’re thrilled to announce the Hostess Bakery Petites as the latest product launch that delivers a premium snacking platform,” Mr. Toler said. “Our Cake Delights, Brownie Delights and Crispi Thins are great for on-the-go snacking, are made with no artificial colors, no artificial flavors and no high-fructose corn syrup. They have been rolled out in the marketplace over the last few weeks and will continue to gain distribution into 2018. It is still very early, but thus, we feel very excited about this unique product offering, its potential for growth and its potential to elevate the category.”
Asked by an analyst whether the introduction of Bakery Petites is more “novel” than what Hostess has tried in the past, Mr. Toler responded: “We think it’s category elevating and really fits into the trend of permissible indulgence, fits into millennials eating these kind of products, doing more of the snacking and grazing-type things. We’re really comfortable with where this is from a strategic perspective. These products have very good margins. We’re making probably 80% of the volume from these items in-house in one of our most effective lines — effective parts of the business. And we have very good margins on this and expect to be able to market, drive trial and do all the things we want to do to build our brand and to elevate a category like this.”
On tap for 2018 are cake slices, peanut butter Ding Dongs, jumbo Donettes and full-size Donettes, Mr. Toler said. The company also will renovate key existing items, including Butterfinger Brownies, and plans to initiate a full roll-out of peanut butter Twinkies. Overall, peanut butter has been a solid extension platform for the company, Mr. Toler said.
“We have gained $10 million in point of sale from the launch of peanut butter Ho Hos and a limited-time offer we did on peanut butter Twinkies,” he said.
The third part of Hostess’ growth strategy is centered on whitespace opportunities. Mr. Toler said the company continues to build traction in in-store bakery, food service and other developing channels.