Hostess Donettes, snack cakes and brownies
Hostess' recent results were led by snack cakes, brownies and Donettes.

KANSAS CITY — The ability to penetrate white space channels, coupled with good momentum in sub-brands and strong consumer demand for core products, led to strong sales and earnings at Hostess Brands, Inc.

Net income in the first quarter ended March 31 was $24,199,000, equal to 16c per share on the common stock, which compared with $12,258,000, or 8c per share, for the pro forma first quarter of 2016. Net revenue was $184,538,000, up 15% from pro forma net revenue of $160,217,000 in the previous year. Adjusted EBITDA increased 13% to $54,510,000, which compared with $48,132,000 for the pro forma first quarter of 2016.

At 17.1%, Hostess’ share of the sweet baked foods category in the 52-week period ended April 22 was up 126 basis points from the prior year, according to data from Nielsen.

William Toler, Hostess
William D. Toler, president and c.e.o. of Hostess

“Results were led by snack cakes, brownies and Donettes, and I’m pleased to report that almost all major Hostess sub-brands posted market share gains,” William D. Toler, president and chief executive officer, said during a May 9 conference call with analysts. “We expect to build on that as we will continue to grow faster than our categories. We continue to increase the number of items in distribution, and those are driven by the convenience, drug and grocery channels, behind improved execution and expanding core products into more stores.”

Citing the Nielsen data, Mr. Toler said Hostess in the 52 weeks ended April 22 achieved the No. 1 share position in c-stores and remained a market leader in the drug channel. He did note that one of the leading drug retailers has moved the entire sweet baked foods category to a different part of the store, which has led to a bit of a drop in the drug channel business as consumers adjust to whether they can find the product.

Hostess Suzy Qs and SweetShop brownies
Hostess benefited from the wraparound effect of Suzy Q and Hostess SweetShop brownies.

“That’s been something we’re working on, (and) we’re working on trying to mitigate that with some merchandising ideas,” he said.

Mr. Toler said Hostess sold “substantially more” from its innovation in the first quarter of 2017 than in the same period of 2016. Specifically, he said the company benefited from the wraparound effect of Suzy Q and Hostess SweetShop brownies, as well as early 2017 product launches.

“We’ve been encouraged by the retailer and consumer response to our new items,” he said. “Donettes is our largest business, and we’ve (recently) launched cinnamon sugar crunch. We’ve also launched the first line extension on Ding Dongs, a 50-year-old brand that has historically only had one s.k.u. (stock-keeping unit). Now we have new white fudge-covered Ding Dongs and, of course, the traditional chocolate Ding Dongs. We’re also doing an improved fudge-covered Twinkie and launching the Chocolate Cake Twinkie. Who doesn't love chocolate cake?

Hostess Cinnamon Sugar Crunch Donettes
Hostess recently launched Cinnamon Sugar Crunch Donettes.

“Peanut butter has been the No. 1 flavor gap in our portfolio for a number of years. So last year we converted our Indianapolis bakery to be able to handle peanut butter, and we recently relaunched Peanut Butter Ho Hos. We will release more of our classics with peanut butter in the future. We’re expanding our coffee cake line with apple streusel and with our cupcakes offering, the Golden Cupcake.”

While there has been some slowdown in overall category growth for the sweet baked foods segment, Mr. Toler said he does anticipate a slight rebound.

“There’s not a big wave of innovation from our competition that we have seen,” he said. “Our innovation is just hitting the shelf. So I would say that the category should strengthen some, but I don’t think it’s going to go up to that 4% level or so. I think it’s going to get a little stronger than it has been, but I don’t expect it to get back to that 3%, 4% level in the next few months.”

Hostess Apple Streusel Coffee Cakes
Hostess is expanding its coffee cake line with new Apple Streusel Coffee Cakes.

Mr. Toler said Hostess’ white space efforts in distribution innovation also are beginning to show traction.

“Since acquiring Superior on Main, our in-store bakery business… has grown 16%,” he said. “And with the launch of Hostess Bake Shop, we’ve learned that I.S.B. doesn’t have the same predictable cadence for new items and merchandising as sweet baked goods. There’s less discipline on the planograms, timings and resets than it is in grocery, and our programming will take a little longer to take hold. That being said, we’re pleased with early response to Hostess Bake Shop.”

To better achieve success in the I.S.B. model Hostess has implemented a number of changes, Mr. Toler said, including integrating the I.S.B. sales team with the Hostess packaged sales team and leveraging current existing customer relationships.

Hostess peanut butter Ho-Hos
Hostess converted its Indianapolis bakery to handle peanut butter and recently relaunched Peanut Butter Ho Hos.

“While we believe the Hostess brand can play well in the category through the Hostess Bake Shop, we’re also planning to offer co-branded products and have incremental innovation planned for later this year,” he said.

During the conference call, Mr. Toler was asked whether Hostess has any plans to broaden its portfolio into cookies, an area the company currently isn’t participating in.

“It’s the single biggest product segment we don’t compete in today within sweet baked goods,” he said. “And, interestingly, it’s a big product segment in I.S.B. as well. We’re moving into I.S.B. with cupcake cookies, so we’re starting to play over there a bit.

Hostess Bake Shop CupCake Cookies
Hostess moved into I.S.B. with its Bake Shop CupCake Cookies.

“But in the sweet baked goods aisle, we have not yet found the right solution for whether to buy our way in, innovate our way in, or what really is the Hostess answer for that. But you’re right; it’s a place that certainly the consumer would expect us to play, and we certainly have an interest. We just have to develop the right product analogue to do that.”

Hostess reaffirmed its previously issued 2017 guidance for net revenues of $781 million and adjusted EBITDA of $235 million. The company expects net income of $98 million in fiscal 2017.