KANSAS CITY — Strength in core branded products and new breakfast innovation helped drive growth across key retail sales channels for Hostess Brands, Inc. in the third quarter of fiscal 2019.
Net income of Hostess Brands in the third quarter was $10,729,000, equal to 8c per share on the common stock, down 4% from $11,152,000, or 8c per share, in the same quarter in 2018. Net sales were $227,211,000, up 8% from $210,982,000.
Weighing on profits during the quarter were costs related to the sale of the company’s In-Store Bakery (I.S.B.) business to Sara Lee Frozen Bakery on Aug. 30 and debt refinancing. Adjusted gross margin during the quarter increased by 270 basis points.
“We continued our growth momentum during the third quarter, demonstrated by the strong 8.8% point-of-sale (P.O.S.) increase in our 118 basis point market share gain in our category, which is ahead of the sweet baked goods category and total food,” Andrew P. Callahan, president and chief executive officer, said during a Nov. 6 conference call with analysts. “Impressively, this growth builds on our second quarter P.O.S. growth of 6.3%, again, significantly outpacing the 2% year-to-date growth of the category in total. This strong consumer-driven demand drove our 7.7% net revenue growth in the quarter. When we exclude the revenue attributable to the In-Store Bakery business we sold at the end of August, net revenue increased 9.2% in the quarter and 9.4% for the year-to-date.”
Mr. Callahan said Hostess’ results were driven by the broad-based strength of its product offering, including its core Hostess branded products and new breakfast innovation.
He said donuts and cupcakes were revenue “outperformers” during the third quarter, with continued strong distribution and merchandising support across multiple retail channels. Sales growth also was fueled by new Hostess branded Danishes and Dolly Madison products, the latter of which posted sales volume gains as Hostess leveraged its acquired Cloverhill customer relationships.
Net revenue growth also benefited from well-executed price increases that were sold into customers beginning in the fourth quarter of 2018 and have continued throughout 2019, Mr. Callahan said.
Updating its outlook for 2019, Hostess narrowed the expected earnings-per-share range to 58c to 61c (versus a forecast of 57c to 62c in August) and adjusted EBITDA to $202 million to $208 million (from $200 million to $210 million forecast in August).
Gross profit of the Sweet Baked Goods segment was $68,804,000, up 17% from $58,886,000. Sales were $220,156,000, up 9% from $201,693,000.
Describing the sweet baked goods category as “highly impulsive and expandable,” Mr. Callahan said Hostess has new innovation on the way in the form of a triple chocolate brownie.
“This is a highly differentiated consumer-preferred product that allows us to participate in and capture a disproportionate share of a $250 million-plus brownie subcategory that has grown 5.5% over the last year,” he said. “We are excited about this new product launch and the incremental revenue we believe it will generate in the future.”
Mr. Callahan said Hostess also believes in the power of limited-time offerings, noting small changes in traditional products — when executed well and grounded in a consumer need — can have an outsized impact on growth.
“We use fun, high-demand flavor and form varieties and extensions, exciting usage-driven limited time offerings or L.T.O.s to drive incrementality, increase buy rates among existing consumers and bring new consumers to the category,” he explained. “This was evidenced again this quarter as we continued to achieve meaningful revenue growth, driven by our recent innovation and L.T.O.s.”
Specifically, he mentioned the success of Hostess Birthday CupCakes. Initially introduced as a L.T.O., Birthday CupCakes have grown to become the No. 2 flavor within the Hostess CupCake portfolio, Mr. Callahan said.
Mr. Callahan said Hostess continues to believe breakfast can be a robust opportunity for growth. In the 52 weeks ended Sept. 28, Sweet Baked Goods breakfast revenues rose 2.6%, he said.
“Our meaningful expansion in breakfast is going … and is growing,” he said. “We have continued to unlock capabilities and innovation supported by the Cloverhill acquisition. For example, during the quarter, our Danish portfolio accounted for more than half of the total category’s Danish growth. Another breakfast innovation launching in Q4 2019 is the Hostess Cream Cheese Coffee Cake. Our research indicates cream cheese is the No. 2 consumer preferred flavor alongside our successful Cinnamon Coffee Cake. Cream Cheese Coffee Cake will be a new flavor to the segment, and I expect it to be highly successful based on the initial response.”
The In-Store Bakery segment had gross profit of $1,616,000 during the third quarter, up 8% from $1,492,000 during the same period a year earlier. Sales were $7,055,000, down 24%. Cutting into profits was the sale of the company’s In-Store Bakery business on Aug. 30.
In the nine months ended Sept. 30, overall net income at Hostess was $54,010,000, or 39c per share, down 17% from $65,074,000, or 51c per share, in the same period a year ago. Sales were $691,009,000, up 9% from $635,574,000.
Mr. Callahan said the relocation of the company’s primary distribution center to Kansas from Illinois is moving forward and on track with expectations. Hostess expects the first shipments out of the new facility to occur during the fourth quarter, with the full transition anticipated early in the first quarter of 2020.