Hostess hits seven quarter streak of 9%-plus growth

Hostess hits seven quarter streak of 9%-plus growth

KANSAS CITY – Data analytics have helped Hostess Brands, Inc. chalk up seven consecutive quarters of 9%-plus sales growth, major market share gains and repeat consumer purchase rates far above competitors, said Andrew P. Callahan, president and chief executive officer.

In a Nov. 9 call with investment analysts, Mr. Callahan credited management’s “maniacal” focus on return on investment and analytics with paving the way for effective product innovation and sustained growth. During the company’s third quarter, Hostess net revenues surged, prompting an increase in guidance for the full year. Bottom-line performance was less impressive, and the company did not change its outlook for adjusted EBITDA or earnings per share.

Hostess Brands net income was $26.19 million in the third quarter ended Sept. 30, equal to 20¢ per share on the common stock, essentially unchanged from $26.23 million, or 20¢ per share, in the third quarter last year. Net sales were $288 million, up 10% from $261 million in the third quarter last year.

Adjusted net income for the quarter was $28.9 million, up 14%. Factors contributing to the adjustments included project consulting costs of $1.6 million and “other” costs totaling $1.8 million related to certain unspecified corporate initiatives.

In a full-year outlook update, Hostess raised its revenue growth projections to 9% to 10% from 2020, up from previous growth guidance of 7.5% to 9%. The company’s adjusted EBITDA forecast was left unchanged at $260 million to $268 million and adjusted earnings per share at 83¢ to 87¢.

Gains in net revenue during the third quarter were fueled by strong sales of sweet baked foods, up 11% to $24.7 million during the quarter.

“This growth was led by gains in the club, dollar, convenience, drug and grocery channels with continued momentum of single-serve products driving favorable product mix,” the company said.

Cookie sales climbed 9% to $29.2 million during the quarter. Growth was attributed to expanded distribution and strong point-of-sale growth.

Gross margins during the quarter narrowed to 34.5% from 35% a year earlier. Pressuring margins were higher costs for transportation and input costs. The inflationary effects were mitigated by favorable product mix, pricing actions and productivity initiatives, Hostess said.

In the conference call, Mr. Callahan pointed out the strong revenue growth — topping 9% — has been consistent since the start of the pandemic.

“That is seven straight quarters of above 9% sales growth,” he said.

Point-of-sale (POS) trends were positive too, he said, noting that sweet goods POS sales jumped 13.7% with the Hostess brand enjoying 14.3% growth.

“We continue to strategically pivot our portfolio to the higher-margin, faster-growing Hostess brand,” he said. “Snacking categories continued to grow faster than overall food, and our portfolio is clearly in the consumer sweet spot as we posted 179 basis points of market share gains in measured channels during the quarter.”

The gains swept Hostess’ market share above 20% during the quarter to 21.6%, the company said.

Mr. Callahan also highlighted POS sale growth for Voortman during the quarter, up 20.5%, well ahead of the cookie category.

Drilling deeper into the sales growth, Mr. Callahan said 40% of the company’s retail stores are made at convenience stores and that the company is likely to benefit from improved mobility that is tracking increases in vaccination rates. Single-serve POS sales jumped 15% during the quarter versus a year ago and are up 18% on a two-year stacked basis.

At the other end of the product configuration range, multipack and bagged donut sales rose 12% in the quarter, 22.5% on a two-year stacked basis, Mr. Callahan said.

“Notably, unlike many of our food peers, our two-year sales trends are accelerating, signaling sustained top-line momentum,” he said.

Highlighting new product introductions, Mr. Callahan said Lemon Baby Bundts and Cinnamon Baby Bundts were among the fastest growing stock-keeping units in the sweet goods category and that Crispy Minis’ are enjoying steadily building distribution. He said Muff’n Stix have been a hit with on-the-go consumers, building c-store distribution and enjoying repeat rates higher than expected. Hostess is building distribution for Voortman Super Grains, he said.

“With our maniacal ROI mindset, we continue to invest in capabilities and data analytics to further strengthen our new product innovation and sharpen our retail execution leading to better performance at the shelf and more sustainable share gains,” Mr. Callahan said.

He said data suggest Hostess Brands enjoy repeat purchases by consumer at twice the rate as the category in total.

Turning to costs, Mr. Callahan said Hostess has not escaped pressures from a challenging labor environment, including higher overtime costs and rising hiring and training expenses.

“We now expect full year inflation to be toward the higher end of our mid-single-digit range with inflation approaching 10% in the back half due to higher freight, labor, commodity and energy-related costs,” Mr. Callahan said. “That being said, we believe higher realized prices and additional productivity initiatives will offset rising costs, leading to relatively flat gross margins.”

In the first nine months of 2021, Hostess net income was $82.77 million, equal to 63¢ per share, down 22% from $106.1 million, or 86¢. Sales were $845 million, up 11% from $761 million.