Andrew Bary

The Twinkies deal has been a disaster.

J.M. Smucker's $5.6 billion purchase of Hostess Brands in late 2023 is shaping up as one of the worst merger deals in recent years.

J.M. Smucker said Tuesday as part o f its quarterly earnings report that it would take a $980 million noncash impairment charge, or write-down, related to its Hostess investment, bringing the total Hostess-driven write-downs for the company's fiscal year that ended in April to nearly $2 billion. It is unusual to see such a large write-down within two years of the closing of an acquisition.

Hostess is the maker of Twinkies, Donettes, cupcakes and other treats sold in grocery and convenience stores.

The Hostess deal raised eyebrows in the food industry because of the high price paid by Smucker at around 30 times after-tax earnings and 17 times Ebitda (earnings before interest, taxes, depreciation and amortization). Food stocks then traded closer to 15 times after-tax earnings. Smucker made the deal just as Novo Nordisk was rolling out its GLP-1 diet drug Wegovy, which has hurt makers of snack foods.

J.M. Smucker shares were down 15% Tuesday to $94.41 after hitting a new 52-week low. It recovered a small portion of that big loss Wednesday, gaining 1.7% to $96. The shares aren't much above their 10-year low set in late 2018. The stock is down 12% so far this year.

The stock of the maker of Folgers coffee, Smucker's jam and Milk-Bone dog biscuits plummeted Tuesday largely because the company issued disappointing earnings guidance of $8.50 to $9.50 a share for the current fiscal year ending in April 2026. The consensus estimate was around $10.25 a share. Hostess's ongoing problems didn't help.

Hostess sales, which Smucker categorizes as sweet baked snacks, were down 14% year over year to $251 million in the April quarter excluding the impact of divestitures while segment operating profit fell 72% to just $20 million in the quarter.

Robert Moskow, the food analyst at TD Cowen, wrote that the problems at Hostess are "intensifying."

"While the conservative nature of the guide may derisk the stock to some degree, we expect SJM to remain in the penalty box until the company proves it can capture more of the profit pool in coffee and stop the bleeding on the struggling Hostess acquisition," he wrote.

What has gone wrong? Moskow wrote about what he termed "poor execution" including Smucker's sales efforts and the challenges of delivery in a fresh bakery business. Headwinds from GLP-1 drugs aren't helping. Another problem is Health and Human Services Secretary Robert F. Kennedy Jr.'s campaign for healthier eating. With a long list of ingredients designed to preserve taste and freshness, Twinkies have never been on a list of healthy snacks.

In prepared remarks issued in conjunction with the earnings release, Smucker addressed the Hostess problems, citing "selective" spending by consumers. It added: " We did not perform with excellence from a distribution, merchandising, and competitive standpoint. We are addressing these challenges and are committed to returning the Hostess brand to growth."

Smucker financed the bulk of the $5.6 billion Hostess deal with debt, which has led to an increase in its debt to about $7.7 billion from around $4 billion at the time of the transaction.

At the time of the deal, Hostess was viewed as one of the better growth stories in the sluggish food industry as it capitalized on favorable snacking trends and consumer demand for what the industry called "indulgences" like Twinkies and Hostess CupCakes. That helped spur Smucker to buy the company and wh at Smucker called its "iconic snacking brands."

Some analysts argue that the worst may be over for Smucker with the stock trading around 10 times projected current-year earnings and yielding 4.5%.

"We view many aspects of the guide conservatively with valuation at the lower-end of center-store peers," wrote Morgan Stanley analyst Megan Clapp, who has an Overweight rating and $115 price target.

Food stocks have rarely been so out of favor with shares of leading companies like General Mills and Kraft Heinz down about 15% in 2025 and yielding 4%-plus.

It's a tough environment for traditional food companies, and acquisitions have been seen as a solution. But as the Hostess deal shows, companies need to be careful about what they buy and what they pay.

Write to Andrew Bary at andrew.bary@barrons.com

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June 11, 2025 16:25 ET (20:25 GMT)

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