Flowers Foods will look at new markets for its enlarged portfolio of bread brands to boost volumes before it considers reopening the former Hostess Brands bakeries it acquired earlier this year.
In March, the US group bought the majority of Hostess Brands’ bread units, including Wonder, Nature’s Pride and Merita, following the collapse of its rival.
The deal helped boost sales and profits for Flowers, which yesterday revealed earnings that soared to US$159.7m from $66.3m a year earlier, and sales of $1.06bn from $844.6m.
Speaking on the firm’s earnings call yesterday, Flowers CEO Allen Shiver said its approach to expansion will be in “organised and methodical”.
“It’s a market-by-market decision. So I don’t give away anything to competition, I’d rather not comment on the individual markets, but it’s obvious that we’re going to continue to grow the company. There are some very attractive markets that we’re not currently serving today. And to do that adequately, at some point, we’ll need to reopen bakeries.”
However, Shriver added the first step will be to enter new markets and transport product from the firm’s current bakeries.
“At the point that we’re established in the marketplace and our sales support the reopening of the bakery, we’ll look at those one at a time. So I want to give you the impression we will continue to enter new markets. And as we do that, we’ll build our sales volume from existing clients. When sales volumes are acceptable, then we’ll reopen the bakeries in those markets.”
BB&T Capital Markets analyst Brett Hundley said Flowers’ bread business holds “considerable promise” in 2014 and beyond.
“It is gaining share in the important California market, and we expect it to ramp capacity higher there, as needed. Its expansion markets are picking up at an increased rate, helping to improve utilisations and establish market presence.”
Hundley said he expects the company to re-introduce the Hostess brands “where it has sizeable share first”, helping to absorb any excess capacity and limit any cannibalising of sales.
Addressing the question of potential cannibalisation in some markets with the re-introduction of the former Hostess brands, CFO Steve Kinsey said there was likely to be some “depending on the consumer acceptance”.
“As we roll those brands out, we’ll rationalise SKUs and we’ll look at our space and try to make sure we have the right mix of product on the shelf.”
Despite the optimistic outlook for the bread business, Flowers’ full-year EPS guidance missed analyst expectations on capacity constraints and annualised costs related to the Hostess deal.
Janney Montgomery Scott analyst Jonathan Feeney nonetheless said he was “encouraged” by signs Flowers continues to hold its share gains in bakery snacks since the collapse of Hostess despite the new Hostess Brands LLC reintroducing Twinkies and other snack cake brands under new owners.
In March, private-equity firms Apollo Global Management and Metropoulos & Co. paid $410m for the majority of the former Hostess Brands’ snack cake business, including the Twinkies brand, after the company went out of business. They have set up a new company, Hostess Brands LLC, which has re-started production.
Flowers saw its cake sales jump in the wake of the collapse of Hostess and Shiver was upbeat about its prospects despite the renewed competition. “Since Hostess left the market in November, Tastykake sales have grown at a good pace. Our brands, our broad product offering, the freshness and the quality of our products and our customer service have helped us gain new business. We realise that Hostess cake may have a place in the market, but we have confidence that our cake business will weather that reintroduction very well.”
In the first two weeks since Hostess re-entered the market with cake, Shiver said IRI data shows its cake brands have maintained their share. “Interestingly, the cake category as a whole increased, as Hostess came back into the market. So again, I will say that we have confidence in our cake business.
“No matter the interim result, we are confident in TastyKake’s ability to compete longer-term, given product quality and service levels afforded by DSD shipment. As the company continues to expand in new markets, we expect continued solid performance from the brand.”