According to Andy Callahan, Hostess CEO and president, the CPG industry will feel the pressure of inflation for the rest of 2018 and into 2019.
“As such, we will implement our retail price increase and incremental retail programs to help offset inflationary headwinds,” he said.
This has affected the company’s Q2 bottom line.
Although Hostess posted a 6.2% increase in net revenue to $215.8m, mainly driven by its recent acquisition of The Chicago Bakery.
These results “significantly” missed expectations, said Callahan.
He noted the period was impacted by “the quickly escalating inflationary cost in the supply chain” as well as by “a decline in retail inventory and consumer pool due to lower promotional support from one large retail partner.”
The retailer, which Callahan did not name during the earnings conference, had recently changed its “lifestyle display philosophy” and reduced its inventory for Hostess’ products, thus costing 12.6% of the bakery’s point of sales during the period.
RBC Capital downgraded Hostess Brands after the announcement of its Q2 earnings.
Analyst David Palmer said it was Walmart that Hostess was referring to when it said a large retail partner reduced its promotional support.
He also noted higher freight, labor and packaging costs for Hostess moving ahead.
However, Callahan assured investors the retail partner will moderate its move moving forward and said the company was working on restructuring our customer pricing and a merchandizing program to manage inflation.
Driving new consumers to buy sweet baked goods
According to Callahan, the consumption rate of Hostess products is still ahead of the overall sweet baked goods category, despite the challenges.
The sweet goods sector posted a quarterly revenue of $204m, up from $192m a year ago, while the point of sales of Hostess’ branded items increased 2.4%.
The point of sale for the company’s top seven brands, which represent nearly 66% of the company’s quarterly revenue, increased by 4.4%.
Hostess’ market shares in the convenience and food channels are also at “all-time high” since its relaunch in 2013.
These growths are closely tied to the company’s innovation with Bakery Petites and Jumbo Donettes (part of its breakfast portfolio), said Callahan.
“Both of these innovations are extendable platforms and are highly incremental to our business,” he said.
“The Bakery Petites continues to build distribution and added 36 basis points our market share for the quarter… [It] has also been driving new users to the category. So we are working to extend this platform with new items.
“The addition of the Chicago Bakery gives us the power to drive meaningful improvement to our share in the breakfast sub-category,” added Callahan.