December 10, 2022

Analyst remains upbeat on Hostess prospects

NEW YORK — Potential threats to the momentum of Hostess Brands, Inc. have not yet translated into problems for the Kansas City-based company, said Robert Moskow, a research analyst with Credit Suisse. Concluding that prospects for the snack cake company remain bright, Mr. Moskow offered an update on Hostess following recent meetings conducted with top company executives.

The update touched on numerous topics, but with a particular emphasis on the different ways inflation may or may not adversely affect Hostess, Mr. Moskow said.

“(Chief executive officer Andrew P.) Callahan struck a positive tone regarding the company’s near-term business momentum while also acknowledging the risks of higher inflation and the likelihood that a competitor will rebound in the next few quarters after facing supply chain disruption in 1Q,” Mr. Moskow said.

Credit Suisse currently rates Hostess as an outperform, one of only three companies with that rating (together with Mondelez International, Inc. and The Hershey Co.).

While Hostess has raised its inflation expectations to high teens from low single digits in January, the company initiated new pricing action during the second quarter as an offset, Mr. Moskow said. He said the company expects some margin pressure in the second quarter from an implementation lag but with profitability improving in the final half of the year.

“They have modeled increased elasticity from consumers in response to these pricing actions, but the SBG (sweet baked goods) category has proven resilient to economic recessions in the past, and Hostess has strong positions in the value segment of the market,” Mr. Moskow said. “Interestingly, Callahan emphasized the importance of long-term gross margin sustainability as important to its long-term model because of its correlation with ROI (return on investment).”

In response to questions about potential pushback from Walmart Inc. on future pricing, management said no change in Walmart’s attitude toward inflation and pricing was detected during meetings between the companies.

An important potential threat to a segment of Hostess’ business stems from rising fuel prices, Mr. Moskow said. He said that historically, sweet baked goods sales come under pressure when gasoline prices are strong since consumers tend to cut back on driving.

“But management said they have not seen any signs of this behavior in the c-store channel yet,” he said. “Drivers trying to save money are fueling their tanks halfway and still entering the store to buy snacks. Sales in the dollar store channel remain robust. The company expanded distribution significantly at Dollar Tree when the retailer introduced $1.25 price points. Management emphasized its extended shelf life technology as a competitive advantage over direct-store distributors in the push toward channel ubiquity.”

Longer term, Mr. Callahan remains very upbeat about Hostess growth prospects, telling the Credit Suisse analysts the company is “just getting started.” Its SBG market share is at 21%. While the company may not match in 2022 the strong performance of new products last year like Bundts and Crispy Minis, “the company is operating with a much more sophisticated consumer-driven approach to innovation than its peers and has a more robust pipeline,” Mr. Moskow said. Recently introduced products, including the Boost donuts and Bouncers, have done well, he added.