THOMASVILLE, GA. — While Hostess products accounted for less than 3% of quarterly sales at Flowers Foods, Inc. and the acquired Hostess Brands assets were a drag on Flowers profitability, the company was upbeat about its relaunch of Wonder.
In issuing financial earnings results for the fiscal year ended Dec. 28, Flowers Foods offered limited insight into the performance of the Hostess Brands, Inc. assets acquired during fiscal 2013 and how the relaunch of the Hostess products was going.
Flowers said sales of the reintroduced Hostess bread brands Wonder, Home Pride, Merita, and Butternut were approximately $22.8 million in the quarter.
Gross margin in the fourth quarter of fiscal 2013 was 46.9%, down 100 basis points from the same period a year earlier. Flowers attributed the decline, in part, to carrying costs related to the acquired Hostess assets. During the quarter, Flowers said the carrying costs totaled $5.3 million, equal to nearly a quarter of total Hostess sales. Flowers said the carrying costs cut into Flowers EBIT margins by 60 basis points and EBITDA margins by 30 basis points.
In the earnings announcement, Allen L. Shiver, president and chief executive officer, said carrying costs, interest charges related to acquisitions, and integration costs will decline over time as Flowers “opens bakeries, determines the optimal long-term use of the former Hostess assets and reduces debt.”
Mr. Shiver was more expansive about the Hostess performance in a conference call with investment analysts Feb. 6. He said sales of the Wonder, Merita, Home Pride and Butternut brands have rebounded nicely despite being off store shelves for several months.
“Those brands now have a 37% A.C.V. (all-commodity volume (share)) and have gained a 3.2% dollar share of white loaf in the total U.S.” he said. “As we expected, the new brands have been very beneficial to growth in our expansion areas in the Midwest and in the Northeast.
“Let me share a few examples of how the brands are performing.
Our Butternut white loaf was the No. 2 loaf in the Cincinnati market on its very first week of introduction, and it has retained that No. 2 rank every week since then. Wonder Classic has been the No. 1 loaf in Providence, R.I., for the last six weeks. In the eight weeks ended Dec. 22, 2013 Wonder Classic was in the top 10 loaf breads in Boston, Hartford (Conn.), Springfield (Mo.), Kansas City, Little Rock (Ark.), Mississippi, Oklahoma City, Providence, Richmond (Va.) and Tulsa (Okla).
“Merita Old-Fashioned was a top 10 loaf item in Charlotte (N.C.), Jacksonville (Fla.), Knoxville (Tenn.), Raleigh (N.C.) and Greensboro (N.C.) for the week ended Dec. 22. It is very important to note that we are gaining incremental sales with the acquired brands.”
On the downside, Mr. Shiver said some cannibalization of Flowers’ brand sales has occurred as expected.
“However, the brands are also regaining volume from competitor’s brands and from store brands provided by other bakers,” he said.
In the South, Flowers had gained “significant volume” share before the relaunch of the Hostess brands, Mr. Shiver said.
“Even so, we believe our brand portfolio is strengthened in those mature markets, and we have seen slight incremental volume in some markets,” he said. “Overall we are maintaining our strong share in the South markets.”
The greatest incremental gains from the relaunch have been achieved in Flowers’ new markets, Mr. Shiver said.
Overall, Flowers has gained 6.3 share points in the U.S. bread market with half of the gain coming from its relaunched brands, Mr. Shiver said.“Those brands also contributed to our share gain in soft variety bread and in buns and rolls,” he said.