Hostess Brands (TWNK) delivered a record third quarter, posting double-digit growth on both the top and bottom lines. The Twinkies maker also raised its expectation for full-year sales growth.
Investors seem happy, especially considering the stock reached an all-time high of $29 last week. Let's take a closer look at Hostess Brands' most recent quarter, what lies ahead for the company, and why this consumer staples stock keeps reaching new heights.
Strong sales across the board
Driven largely by price increases, Hostess' organic net revenue for Q3 jumped 20.2% from last year, reaching $346.2 million -- a record sales number. The Lenexa, Kansas-based company enjoyed growth across its entire portfolio during the third quarter.
Accounting for almost 90% of total sales, sweet baked goods revenue grew 18.7% year over year. The company's breakfast portfolio enjoyed a 20.6% sales rise, but the biggest increase was observed in the cookie category, which jumped 33.2%.
A main catalyst behind the explosive cookie sales growth has been the introduction of Voortman-branded products to the Hostess family. Acquired in 2020, Voortman has helped Hostess gain momentum and profitability ever since.
Voortman's product presence grew by 28.8% in the third quarter, and its share of the cookie category increased by 26 basis points year over year.
The timing of the acquisition couldn't have been better, and it positioned Hostess to take full advantage of ongoing momentum in the flourishing sugar-free sweets category.
During the company's Q3 earnings call, CEO Andy Callahan expressed being "very pleased" with the better-than-expected performance of Voortman, which has been crucial for supporting Hostess' constricted margins.
Sky-high operating costs
Despite the company's record revenue and outsize performance, diminishing margins have been a major drag on Hostess in 2022. When asked about year-over-year margin decline, CFO Travis Leonard commented that the company's "largest headwind" has been inflation.
Third-quarter gross margins fell by 105 basis points year over year. A fragile supply chain led to reduced operating efficiency for the Donettes maker, which compounded with 18.5% inflation to squeeze Q3 margins.
Callahan reassured that Hostess is "committed to recovering gross margin and expanding it modestly over time." With further price hikes reserved as "a last resort," the company intends on bolstering margins with comprehensive productivity improvements.
During the Q3 earnings call, Leonard outlined the company's recent "investment into innovation," including sweeping enhancements across "repeatable and scalable processes." Streamlining Hostess from all angles, the initiatives address bakery, warehouse, procurement, and transportation operations.
Looking ahead
Undeterred by current challenges, Hostess raised its full-year 2022 revenue guidance from 15% to between 17% and 19%. While the updated guidance didn't raise the higher end of adjusted earnings per share, if productivity initiatives can increase short-term profitability, watch for a surprise Q4 earnings beat to finish the year.
This will require strong holiday sales amid a shaky supply chain with winter weather thrown in. However, folks love their sweets during the holiday season, and limited-edition treats like Mint Chocolate Twinkies and Holiday HoHos are sure to draw a crowd.
With such strong investor support and a loyal customer base, if Hostess Brands can continue to grow revenue while improving margins, this stock should keep rewarding investors and sweet tooths alike.
