After bleeding red ink like the jelly out of a freshly bitten Krimpet, the makers of Tastykake snacks are facing a serious question: Whether to sell the company at a fire sale price, or whether to just cry uncle under the crippling weight of its debt.
It’s a sad development for the Pennsylvania sweets powerhouse that was born almost a century ago in Philadelphia. But what’s perhaps most tragic is that the biggest reason pushing parent Tasty Baking (NASDAQ: TSTY) to the brink of bankruptcy is a development that was intended to turn around the company’s battered finances.
Specifically, Tasty Baking used $100 million debt to build and move into a new bakery plant, a move that was expected to create big savings over antiquated and inefficient facilties the company previously used. After moving in last year, the company did see savings – unfortunately, TSTY stockholders were expecting the modern digs to shave $10 million of expenses in the fourth quarter. It only saw savings of $3 million.
It’s a tough reality for TSTY to face – especially considering that the company is about to post fiscal year 2010 numbers that are assuredly going to show a third consecutive fiscal year in the red.
Tasty execs say lenders will to defer payments on the massive bakery and warehouse construction, and is under counsel from an outside adviser to examine options such as refinancing existing debt or a sale.
But the company also conspicuously pointed to the troubles and subsequent bankruptcy filings by the operator of the A&P, Super Fresh and Pathmark grocery chains.
Tastycake may not disappear from the face of the earth if bankruptcy transpires. GM is perhaps the most recent and conspicuous example of how a company can restructure and emergy from bankruptcy leaner and meaner.
However, it’s tough to be optimistic about the company’s sweets. Inflation is pushing up the cost of commodities such as sugar, raising the prospect of even smaller margins and revenue for TSTY. And whatever way you slice them, Tastykake treats aren’t a crucial part of a balanced diet and aren’t a necessary purchase for many families looking to trim back on spending.
It all adds up to a bitter pill to swallow for one of the northeast’s storied bakeries.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter at http://twitter.com/JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
