Does the World Need the Twinkie?

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In November, Hostess Brands received court approval to close its doors and sell off assets after it failed to reach an amicable agreement with its striking bakers’ union.  The company was already operating under bankruptcy for the second time in the last ten years, due to a combination of poor management decisions, restrictive labor practices, and a heavy debt load.  Despite its operating troubles, the company’s history dates back to 1905 and includes some well-known brands, including Hostess, Wonder, and Nature’s Pride.  However, its most iconic product is certainly the Twinkie.  The 4 inch, crème-filled, yellow sponge cake had 150 calories, 4.5 grams of fat, 19 grams of sugar, and virtually no nutritional value.  Yet, the company sold over 30 million of the individually wrapped cakes in 2011.

According to the company, over 100 parties have expressed an interest in participating in the auction of its assets.  As one of the four national bakery companies, Hostess has considerable value through its 33 bakeries, 565 distribution centers, and 5500 delivery routes.  However, the company’s ultimate valuation will be determined by the industry’s future profitability and its ability to control labor and material costs.  So what will the industry look like in the future?

Numero Uno

Grupo Bimbo is the world’s largest baking company with global operations throughout the Americas, Europe, and Asia.  Founded in Mexico in 1945, the company doubled its size in 2011, to roughly $11 billion in sales, after acquiring Sara Lee’s fresh baked goods business.  Grupo Bimbo’s brands include Bimbo, Sara Lee, and Eagle.

The Challenger

Flower Foods (NYSE: FLO) is a manufacturer of fresh and frozen baked goods products through a network of 32 bakeries.  The company grew its revenues by 36.2% over the past four fiscal years through a string of acquisitions, including the purchases of Tasty Baking in 2011 and Lepage in 2012.  Flower’s brands include Nature’s Own, the bestselling brand of soft loaf bread in the U.S.  In its latest fiscal year, it reported sales growth of 7.8%, but operating income fell 8.2% due to integration costs and rising commodity costs.  The company has been able to pass on some of the costs increases to its customers, but industry competition limited overall price increases to 3.7% during the period.  In the first nine months of 2012, Flower has continued to grow through acquisitions, with an increase in sales of 8.4%, but operating margins have declined due to continuing commodity cost pressures.

The Conglomerate

Campbell Soup (NYSE: CPB) is a manufacturer of quality, branded food products throughout the world, including soups, sauces, premium beverages, and fresh baked goods.  The company’s overall sales have contracted by 3.6% over the past four fiscal years, as its growing bakery business has been offset by weakness in its core meals business.  In its latest fiscal year, sales in its Pepperidge Farms baked goods subsidiary rose by 1.7%, but the segment's operating income fell by 11.3% due to rising commodity costs.  Like its competitor, Campbell Soup was able to raise prices, 5% on average, but this move only offset a portion of their rising costs.

Changing Food Choices

Given the industry’s changing landscape, where should an investor go to find promising investments in the sector?  They should look at the grocers who have sizable baked goods operations and are taking the middleman out of the equation.  The best positioned grocer for future growth is Whole Foods Market (NASDAQ: WFM).

Founded in 1980 by four like-minded businesspeople, the company has grown into the world’s largest retailer of natural and organic foods.  Whole Foods has successfully tapped into the nation’s need for improved health outcomes, reporting a 47.1% increase in sales over the past four fiscal years.  While it sells over 21,000 items in its stores, prepared foods and bakery items account for roughly 19% of its annual sales.  The company’s gross and operating margins reached their highest level in FY2012, due to better inventory control and the ability to allocate its costs over a larger store base.  In addition, Whole Foods benefits from its loyal community of shoppers and in-store health programs, which provide networking opportunities and lowers the company’s need for advertising expenditures.

Looking ahead, Whole Foods is forecasting 10 to 12% sales and operating income growth in FY2013, as it expands its 335 current base of stores.  While its stock is valued at a premium with a 35 P/E multiple at recent prices, Whole Foods is a long term holding for investors’ portfolio.


rghanley owns shares of Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Flowers Foods and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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