Hostess Brands (TWNK) just posted its best sales quarter ever -- and its 10th consecutive quarter of double-digit growth. Happy shareholders have helped the stock double in the past two years -- and surge over 20% in the past two months alone.
But to continue on its explosive growth trajectory, the Twinkie maker must first knead through supply chain inconsistencies, rising food costs, and inflation's effect on snack-buying. Can the company do it? Let's see.
Are Donettes recession-proof?
Hostess prides itself on its iconic sweet treats that include Twinkies, CupCakes, Donettes, Zingers, Snoballs, and Ding Dongs. Brand recognition and loyalty are pillars of the company's success over the years -- it's been more than 100 years since the first Hostess CupCake was sold.
But are inflation and rising costs causing consumers to trade down their favorite Hostess treats for something cheaper, or skip them altogether? During the second quarter, Hostess snack sales increased by more than 15% in retail locations. It appears that Hostess fans still want their sweet fix, even in a high-inflation environment.
Image source: Getty Images.
According to Hostess CEO Andy Callahan, increasing its marketing helped the company keep momentum up while seizing additional market share. Referenced during the Q2 earnings call earlier this month, Hostess's strategic advertising rollouts have built powerful brand awareness and a "flywheel of growth."
Callahan explained that, similar to other snacking categories, the sweet baked goods category has low private label penetration -- less than 3%. Nothing can replace powdered Donettes when that craving hits, and Hostess understands this concept well.
To complement its brand recognition, Hostess has streamlined its sales efforts, targeting "growing snacking occasions," such as including a sweet snack in the morning, packing a treat in a lunchbox, or enjoying an afternoon reward.
Rising costs, narrowing margins
While consumer behavior is reassuring, Hostess faces supply chain weaknesses and heightened inflation, which have put significant pressure on margins. Second-quarter margins declined by 295 basis points compared to Q2 of last year.
Hostess Brands also saw a loss in operating income, which saw a 4% decline year over year. Because of lower margins and higher operating costs, the company's adjusted EBITDA margin declined by 14%.
And although gross profits were higher, this figure was offset by Hostess' higher advertising costs, productivity initiatives, and investments in its workforce. Staying proactive on employee retention, earlier this month Hostess rewarded nearly 2,000 bakery and warehouse employees with a surprise bonus.
A record quarter
Hostess reported its best sales quarter ever in Q2, with all-time high organic net revenue of $340.5 million, a 16.8% increase year over year. The company cited a favorable product mix and higher volumes as main sales catalysts.
Gross profit also increased to $112.7 million, a 7.2% year-over-year increase and 33.1% of net revenue. Feeling ahead of schedule for the year, the Hostess management raised its expected revenue guidance from 12% to 15% growth. After hitting $1.19 billion in sales last year, if Hostess can reach its expected growth target, that would mean 2022 revenue of over $1.36 billion.
As Callahan puts it, "We are growing revenue quarter after quarter, year after year." As long as Hostess Brands stays on its current path, an investment in this growth stock could really "snoball" in the coming years.
