News World: Interstate Bakeries Poised for a Pleasant Trip?

Interstate Bakeries Poised for a Pleasant Trip?

By Dave Marino-Nachison (TMF Braden)
September 14, 1999

Leading baker and baked goods distributor Interstate Bakeries Corp. (NYSE: IBC) pulled fiscal Q1 earnings per share (EPS) out of the oven this morning, producing EPS flat with market estimates and last year's results at $0.87.

Key profitability numbers were disappointing. Though revenues rose nearly 2.7% to more than $809 million, gross margins improved just two-tenths of a percentage point while both operating and net margins retreated by similar margins. The shares were off about 3% as of this writing.

"The prior year's first quarter was very strong," said Chairman and CEO Charles Sullivan, "and we equaled that performance."

Sullivan's explanation for the slumping profitability -- costs associated with the closing of old bakeries and the opening of modern facilities -- accounts for some of the trouble with the operating and net margins. But it doesn't add much to our understanding of the company's flat gross profits, which is probably why the company didn't bother to break those out for us in its press release.

A 280,000 square foot facility is slated to go live in Biddleford, Maine sometime in the fiscal second quarter, churning out J.J. Nissen, Hostess, and Wonder products. "Biddleford," said Sullivan, "when fully operational, should become a major contributor to our profitability." The facility replaces three outdated J.J. Nissen bakeries. Additionally, three Wonder bakeries in the Pacific Northwest are scheduled to be replaced by a 150,000 square foot facility in Tacoma, Washington, "later this fiscal year."

"Our short-term earnings are affected by these one-time start-up and consolidation costs," Sullivan said, "but the changes will greatly improve our cost structure going forward."

Sullivan must hope so, as recent events coupled with this not especially inspiring quarter must have investors watching the oven carefully in case someone should shout at the souffle.

Interstate agreed to buy Canadian bakery Culinar, which owns the Hostess trademark in maple leaf territory, in July for about $180 million; Sullivan bought the Drake's Cakes snack business from Culinar in the summer of 1998. But north-of-the-border cheesemaker Saputo Group swooped in at the last moment to top Intestate's bid for North American Twinkie dominance with a $190 million offer, sniping Culinar and its $214 million in 1998 revenues from Intestate's grasp.

The deal was expected to boost Intestate's earnings immediately, and investors may be wondering why their company didn't make a counteroffer. A great many of the independent bakeries out there today are similar in size to Culinar. Unless Interstate intends to take out some of its larger competitors, it will likely have to join them in battling for the favor of the smaller ones.

Still, Interstate remains committed to growth through acquisition as it seeks out other ways to improve profitability.

Also interesting will be the shakedown from a reorganization at Ralston-Purina (NYSE: RAL), which said in June that it will spin off its Eveready Battery unit to concentrate on pet foods. Ralston-Purina holds more than 30 million shares of Interstate stock acquired in 1995; if the pet chow purveyor decides to sell, the bakery has right of first refusal.

Interstate has made its intentions known. If it shows that it can come through on its stated goals of improving costs through acquisitions and plant modernization, it could prove to be an interesting opportunity for investors -- particularly with its shares trading at just over 11 times projected full fiscal year earnings.

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