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Dying Love Affair With Twinkies Is Bad News for Hostess

Consumers initially welcomed Hostess' reemergence from bankruptcy, but it didn't last

By Josh Enomoto, InvestorPlace Contributor

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While Americans love eating Twinkies, Hostess Brands’ (NASDAQ:TWNK) iconic, flagship product, I’ve never gravitated towards it. A childhood trauma, where kids in my school mercilessly teased overweight students as Twinkie-eaters, left a permanent mark. It’s the same type of trauma that I’m sure investors of TWNK stock are feeling today.

After posting sharply disappointing misses on both the top and bottom lines for the second quarter, TWNK stock absorbed a critical body blow. Down 17.6% against the prior session, shares are now down almost 25% for the year. Even worse, TWNK is right back to where prices were in November 2017.

This was not part of the overall plan when speculators resurrected the company. Back in 2012, the original Hostess Brands announced that they had to shut their doors permanently. According to management, a labor strike stretched their financial resources too far.

But after declaring bankruptcy, private equity firms bought out the company. Taking down its headcount and reducing overhead to much more manageable levels, Hostess reemerged leaner, meaner, and (hopefully) greener.

At the time, the buyout, though risky, also made business sense. Hostess became a bloated, ineffective organization, but that didn’t impugn Twinkies or other popular snack brands. While Millennials and younger Americans have shifted towards healthy eating, they also love their indulgences. And for many, the cream-filled sponge cake hit the spot.

For a few years after the revival, sales skyrocketed. When Twinkies first started disappearing off store shelves, it created a culinary buying panic. After reappearing, sentimental consumers started purchasing them by the boatload. In turn, TWNK stock experienced a substantive boost in market value.

But it appears that this honeymoon is over. Not only that, I don’t think we’ll see a renewal of vows.

Terrible Numbers Mean Broader Trouble for TWNK Stock

Many times, the markets overreact to a company’s earnings miss. Unfortunately, this is not one of those cases. Hostess Brands didn’t provide any reason for optimism.

I’m not saying this for dramatization purposes. Ahead of Q2, consensus estimates pegged earnings per share at 16 cents. Instead, the snack-maker produced an unexpectedly feeble 14 cents, or a more than 22% miss.

Analysts viewed the failure to hit the EPS target as conspicuous because Hostess delivered 18 cents in the year-ago quarter. At that time, the company met consensus expectations squarely.

The revenue situation was just as disappointing, if not more so. The Street anticipated a sales haul of $220 million. Instead, the actuals came in at $215 million, or a more than 2% miss. Making matters worse, the revenue figure in Q2 was lower than the lowest individual estimate, which ranged from $217.2 million to $229.9 million.

At least two analysts downgraded their ranking on TWNK stock. But looking beyond the numbers and into the context, more downgrades are likely.

During the earnings conference call, Hostess CEO Andrew Callahan referred to shrinking shelf space and lower promotional support from “one large retail partner.” Callahan played coy until an analyst on the call disclosed that it was Walmart (NYSE:WMT).

However Hostess wants to spin this devastating news, the problem couldn’t be more distracting. Walmart doesn’t know how to say no. As long as a payday is involved, Walmart is all ears.

So when the big-box retailer has decided to dedicate their product shelves to apparently “classier” fare, something’s wrong. Again, America’s love for Twinkies has faded. This time, it’s a permanent divorce.

Twinkies Are Irrelevant in This Age

When Hostess went under almost six years ago, and took their Twinkies with them, Americans were unprepared. Like a beloved TV show that the viewing consensus deemed was cancelled before its time, they sprung into action.

Throughout 2014 through 2016, the resurrected Twinkie found a home in millions of cupboards and cabinets. During that time, revenues jumped over 31%. But between 2016 and 2017, sales increased less than 7%.

In hindsight, that was the signal that the rekindled flames burned out. Q2 provided the final confirmation for any holdouts. The most recent read in quarterly revenue saw a mere 6.2% year-over-year lift. In comparison, the previous Q1 enjoyed a 13% YOY gain.

The sharply declining sales trend indicates that the Twinkies boost was a fad. In reality, today’s younger generation seeks either healthier or more relevant products. Twinkies is part of the analog age, something with which most college-aged kids today are unfamiliar.

Admittedly, it was an impressive run while it lasted. But with the Walmart issue, and challenging consumer trends, I believe TWNK stock has become overly risky.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/dying-love-affair-with-twinkies-is-bad-news-for-hostess/.

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