On the money: Flowers sees gains from Hostess demise

Flowers Foods has expanded its market share in the wake of Hostess Brands move to wind down its operations.

The US baker has been named the "stalking horse" bidder for the majority of Hostess Brands' bread business. While the assets will be sold off in a competitive auction process at the end of this month, Flowers revealed yesterday (7 February) it is already reaping the benefits of its rival's demise.

Flowers said sales for fiscal 2012 increased 9.8% to US$3.05bn. Gains accelerated in the fourth quarter, when the company was able to step in and fill orders that would otherwise have been unmet after Hostess liquidated in November.

"Our team members throughout the company rallied to serve customer needs when Hostess exited the marketplace on November 16th. As a reminder, that was the Friday before Thanksgiving, the start of one of the busiest weeks of the year for our customers - not a time when customers can afford to have empty bakery shelves," Flowers president Allen Shiver commented on a conference call with analysts. "We worked overnight to increase production levels and provide the additional service to take care of our customers."

According to Shiver, this effort contributed to Flowers ability to outperform the US bakery category. Quoting IRI data, he suggested the overall category was down about 1% in terms of value and volume. Flowers unit sales increased 12.9% while dollar value was up 10%, led by growth of the Nature's Own brand, he revealed.

The fourth quarter was "a very busy time to say the least", Shiver said. While Flowers is continuing to pick up new customers in the first quarter of this year, he acknowledged that this was at a slower rate.

He added: "We are encouraged looking at the first four weeks of this year growth is continuing and in some areas accelerating."

While welcoming the good top line showing, Janney Montgomery Scott analyst Jonathan Feeney emphasised Flowers' dollar sales lagged the volume gain and the company struggled to improve margins in what remains a highly competitive environment.

"Flowers top-line surge amidst Hostess' absence underscores the opportunity, but we were disappointed by the lack of corresponding margin lift which we believe speaks to our broader concerns about the extent to which profitability can improve in the tough, over-competitive bread industry," he wrote in a note to investors.

Despite this structural issue, Feeney said that Flowers "will retain the best competitive positioning" and added the group's "consolidation plans, paralleling those of Grupo Bimbo", could "eventually improve industry dynamics".

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