Hostess banks on breakfast and indulgent snacking momentum for healthy bottom line
Net revenue for the quarter was $222.7m, an increase of $16.2m from the same period the year prior, mainly driven by distribution and merchandising support, and price increases.
Profit rose 16.6% to $70.4m, while adjusted gross profit increased 17.4% to $75.2m, or 33.1% of net revenue.
Income declined to $10.7m from $11.2m in the prior period, primarily due to costs related to the sale of its In-Store Bakery business in August to Sara Lee Frozen Bakery for $65m.
Adjusted EBITDA increased 19% to $47.8 million, or 21.0% of net revenue.
“Our financial results were driven by the broad based strength of our product offering including our core Hostess branded products and our new breakfast innovation, which helped to drive growth across our key retail sales channels,” said Callahan.
“Importantly, our Hostess branded products drove 80% of the net revenue growth in the quarter.”
Donettes and CupCakes, in particular, were revenue out-performers.
“Additionally, new Hostess branded Danishes fuelled sales growth and our Dolly Maddison branded products continue to post sales volume gains as we leveraged our acquired Cloverhill customer relationships.” (The Twinkies maker acquired the Chicago-based bakery from Aryzta last year for $25m.
Small changes = outsized impact
Callahan noted the company’s strength lies in making small changes in its traditional products that have “an outsized impact on growth.
“We use fun, high demand flavour and form varieties and extensions, exciting usage driven limited time offerings or LTOs to drive incrementality, increased by rates among the existing consumers and bring new consumers to the category.”
For example, the company took full advantage of the Hostess’ 100th anniversary to launch the Hostess birthday cupcake in February.
“This started as an LTO for our Sweetennial birthday event earlier in 2019 and has become a permanent item based on its very strong sales and positive consumer response.”
Another small tweak was made to the company’s iconic CupCakes – which is sold more than any other cupcake brand in the US, according to Callahan. “Now birthday cupcakes are the number two flavor of the brand.
“We also have new innovation on the way with our Triple Chocolate Brownie. This is a highly differentiated consumer preferred product that allows us to participate in and capture a disproportionate share of a $250m plus brownie sub-category that has grown 5.5% over the last year.”
Callahan said Hostess is applying the same proven playbook to the highly profitable $3.5bn breakfast category, of which it has a 17.8% share.
“Our research indicates that sweet product share of total morning occasions is increasing. 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, which Callahan expected to be “highly successful based on the initial response [of consumers].”
The company also based its new packaging for Donettes on customer feedback.
“This pack change creates a more portable and snack-able Donette, extending them into a new use occasions. The new Donette snack pack has been 70% incremental to the Hostess Donette shopper in stores where both products are present. That is really impressive,” he added.
Earlier this year, the company announced it was opening a new consumer research centre with a lab, sensory test kitchen and focus group space within its new corporate headquarters, which relocated within the Kansas City metro area.
According to Hostess, the centre – opening in Q1 of 2020 – will expand capacity, increase agility and improve the efficiency of the new product, research and development.
The company is also opening an office in Chicago to serve as its new marketing and category management hub, and relocating its primary distribution centre from Illinois to Kansas to be closer to its largest bakery and more centrally located in the US.
“We are part of a large growing and addressable markets including indulgent snacking and breakfast in which there is ample room to grow,” said Callahan.
“We are well positioned to build upon our brand with our excellent operational capabilities and even sharper consumer-driven insights, which together, sets us up for our strong growth going into the future.”
Hostess Brands refined its outlook for 2019 and now expects an adjusted EBITDA of $202m-$208m, an increase of 9%-12% over 2018.