Baked goods and snack foods company Hostess Brands (TWNK
11.60, -2.34, -16.79%) sinks to nine-month lows today after the company
missed both second quarter sales and profit expectations and lowered its full
year 2018 earnings guidance.
Starting with the less than stellar second quarter, Hostess reported earnings per share (EPS) of $0.14 on revenue growth of 6.2% to $215.85 mln. Additionally, Hostess branded point of sale increased 2.4% for the 13-week period ended June 30, 2018. Point of sale for the top seven sub-brands increased 4.4%. These sub-brands represent 66.1% of the company's net revenue.
Hostess’s recently acquired Chicago bakery in the first quarter of 2018 to expand its breakfast product portfolio and manufacturing capabilities. This added significant revenue at negative margins as the company continues to transform the bakery, further reducing the company’s overall margins in the second quarter. and contributed $20.8 mln of net revenue, which was partially offset by reduced Hostess branded display volume and the aforementioned issues at Wal-Mart.
Q2 was directly impacted by the quickly escalating inflationary cost in the supply chain, and a decline in retail inventory and consumer pull due to lower promotional support from Wal-Mart (WMT 90.03, +0.26, +0.29%), as well as additional allowances with customers to drive growth. Although the expenses associated with the transformation of Chicago were significant in the first half of 2018, Hostess expects to perform in line with its original acquisition model in 2018 and remain very optimistic about the accretive opportunities it provides in 2019 and beyond.
Gross profit was $66.9 mln in the second quarter, or 31.0% of net revenue, compared to $88.4 mln, or 43.5% of net revenue. The decline was mainly due to a combination of the shift in mix of revenue to include Chicago non-Hostess branded products, which are currently unprofitable, and the continued efforts to transform the recently acquired Chicago bakery which collectively resulted in 709 basis points lower margin.
Also contributing to the lower gross profit this quarter were higher transportation costs and other inflationary pressures, which resulted in a 447 basis point decrease in gross margin and lower overhead absorption due to decreased production volume.
As it stands, expected headwinds in the second half of 2018 as a result of reduced promotional support from Wal-Mart and inflationary pressures, Hostess has trimmed its full year guidance for 2018 adjusted EPS to $0.52-0.58 from the prior guidance of $0.65-0.70 and now expects adjusted EBITDA of $190-200 mln compared to prior guidance of $220-230 mln.
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