KANSAS CITY — Surging sales at convenience stores and dollar stores helped lift overall revenues and earnings at Hostess Brands, Inc. in the first quarter ended March 31.
Hostess Brands net income in the first quarter was $26.73 million, equal to 20¢ per share on the common stock, down 67% from $81.45 million, or 66¢, during the first quarter last year. Sales were $265.42 million, up 9% from $243.49 million.
Results in the year-ago quarter included a one-time gain of $79.1 million recorded as a change in the fair value of warrant liabilities. The company earlier in May said it would refile financial statements for 2018-20 because the Securities and Exchange Commission said certain Hostess warrants should have been classified as liabilities. The $81.45 million of first quarter net income in 2020 represents a revision from $2.35 million of net income initially reported by the company in May 2020.
Excluding the benefits from the warrants accounting adjustments and other special items, Hostess said net income was $26.9 million, up $8.3 million, or 45%, from the first quarter last year. Improved profitability was attributed to sales volume growth, favorable mix and the realization of synergies from the January 2020 acquisition of Voortman Cookies, Ltd.
For all of 2021, Hostess reaffirmed its outlook for sales growth between 3% and 4.5%, adjusted EBITDA growth of 6.3% to 10.4% and earnings per share growth of 6.7% to 13.3%. The company expects between $60 million and $65 million in capital expenditures, including $25 million to expand cake production capacity to keep pace with growth.
“We had an excellent start to 2021 with strong net revenue and earnings growth across both sweet baked goods and Voortman on top of strong growth in the prior year comparable period,” said Andrew P. Callahan, president and chief executive officer. “Our brands’ strength drove impressive point-of-sale growth, leading to all-time high market share across several channels. We continue to experience elevated at-home consumption, while at the same time, increased on-the-go snacking and consumer mobility are benefiting our profitable single-serve mix. Continued strong execution on productivity and pricing measures gives us the confidence to manage inflation and leaves us optimistic for the remainder of 2021.”
About half of the $21.9 million in sales growth derived from improved sales of sweet baked foods, which were up $11.3 million, or 5%, from last year. The other half came from a $10.6 million, or 62%, improvement in Voortman sales, which contributed about 4 points to total growth.
“The significant Voortman increase over prior year was primarily due to the transition to the warehouse distribution model during the first quarter of 2020,” Hostess said.
The company said this transition helped Hostess begin to realize synergies from the Voortman acquisition.
Hostess outperformed the category during the quarter, with the company’s market share in sweet baked foods growing to 20.7%, a gain of 163 basis points. Market share gains of 327 basis points were captured during the quarter in the convenience channel and 786 basis points in the dollar channel.
During a May 17 conference call with investment analysts, Mr. Callahan offered deeper detail about the sales growth and market share gains. He said the quarter was the 13th straight in which Hostess generated growth from the year before, adding that the company is enjoying “very strong momentum leading into the second quarter.”
Sales of Hostess-branded products rose 10.6%, Mr. Callahan said, adding that the highlight for the quarter was the company’s performance in channels other than supermarkets and mass market stores.
“Our small format success in the quarter was simply remarkable,” he said. “We touched new highs in market share for c-store, dollar and drug with year-on-year share gains of 327, 786 and 570 basis points, respectively. The strategic decision to drive shelf and customer expansion, our consumer and focused innovation created for the needs of the channel and our advantage warehouse distribution model helped drive these impressive results. We are positioned for continued growth as mobility increases, consumers are vaccinated and communities lift restrictions.”
Responding to a question, Mr. Callahan said the c-store success may be traced to initiatives launched not long after he joined the company in May 2018.
“One of the first decisions I made was an investment in more data around convenience store shoppers and how they shop, how it flows through, what are the incrementality of the convenience channel, and that has paid off well,” he said.
New product introductions also have factored into Hostess success, Mr. Callahan said, citing good results from recent limited-time offers. Other recent launches have included Donettes snack packs and base breakfast item core growth across Donettes, honey buns and Danishes.
In the second quarter, the company has made two “major launches,” Mr. Callahan said – Baby Bundts and Crispy Minis. He said “both are off to good starts.”
The company has gained 290 basis points of market share in the breakfast sweet baked foods category, to 20.5%, Mr. Callahan said.
“Strong growth of Hostess coffee cakes, including our new cream cheese flavor, updated packaging for a multipack Danish as well as our early introduction in the market of our Baby Bundts at select retailers, are all resonating with consumers,” he said. “These initiatives build off previous successful launches like Donettes snack packs and base breakfast item core growth across Donettes, Honey Buns and Danishes.”
Describing a range of additional new product introductions, Mr. Callahan said Hostess was well positioned for the “all important summer driving season.”
While conceding it is impossible to predict with precision how demand will be affected as the pandemic winds down, he shared “emerging visibility.”
“I’m not going to say all the models that we look at are perfect because we’re coming out of an unchartered territory here related to COVID,” he said. “But I think all of the consensus, and myself included, is that there’s going to be behavioral changes that are going to stay. And I would expect, specifically for Hostess, and specifically for — I’ll talk more broadly into consumer occasions and need states — that the in-home breakfast occasion is going to stay meaningfully elevated versus where it was. And therefore, that’s good for overall growth projections going forward for Hostess and likely for the category.”