Maker of Twinkies, Wonder bread files for Chapter 11

Interstate Bakeries blames high costs, low-carb diet trend


People are still eating Hostess Twinkies and Wonder bread, but the problem for Interstate Bakeries is that they are eating less of them.

Interstate Bakeries Corp., the nation's largest wholesale baker, said yesterday that it had filed for bankruptcy protection. Many consumers seem to have lost their taste for the company's bread and pastries, many of which have been a staple for more than 70 years. But high expenses were also a factor.

Interstate said it had hired a corporate turnaround specialist, Tony Alvarez II, of Alvarez & Marsal - a New York-based consulting firm that has also assisted HealthSouth Corp., Spiegel Inc. and Warnaco Group Inc. - to succeed its chief executive, James R. Elsesser. Director Leo Benatar was elected non-executive chairman, and John Suckow from Alvarez & Marsal was named chief restructuring officer.

In addition, the company has lined up $200 million in loans from its banks to see it through reorganization. The company filed in U.S. Bankruptcy Court in Kansas City, Mo., listing $1.3 billion in debt.

Interstate said it would continue operating its 54 bakeries, 1,200 outlet stores and distribution centers after getting a $200 million loan from banks led by JPMorgan Chase & Co., pending court approval.

"We have filed, and we have the financing," Alvarez said.

Interstate's decision to file under Chapter 11 did not come as a surprise, analysts say. In recent months, it has struggled as costs climbed and sales sagged. The company twice delayed filing its annual financial statements and warned investors that those statements might raise doubts about the company's ability to continue as a going concern. The stock, which had traded as high as $16.88 in March, had fallen to a low of $2.05 before trading was halted yesterday on the New York Stock Exchange.

Company executives have focused much of the blame on consumer preferences for low-carbohydrate foods over Interstate's carbohydrate-laden white bread and sweet snacks, but analysts say the recent food fads had little to do with the company's current troubles.

"It exacerbates their sales issues," said Mitchell Pinheiro, an analyst with Janney Montgomery Scott, but "it's not the critical issue at all."

Instead, Pinheiro pointed to the company's high labor costs and lack of innovation.

Interstate has been slow to introduce new products in areas that have experienced fast growth, such as so-called premium products, he said. Interstate recently introduced its Baker's Inn line of high-end breads, for example.

The combination of high expenses, including labor costs and the rising cost of ingredients, with declining sales and heavy debt created concerns over liquidity, said Kenneth Drucker, a credit analyst with Standard & Poor's. "The company was in pretty bad shape financially," he said.

Although the Hostess, Drake's and Wonder brands have fallen somewhat out of favor, analysts said these brands remained valuable and that the company's challenge is to bring down costs enough to be in line with lower sales.

"The brands are still viable," Drucker said. The company "just has to be repackaged."

Interstate has experienced a number of management failures, including problems with a new computerized financial reporting system, investigations into its accounting and quality questions about the making of its bread, Pinheiro said.

The company might have to decide whether to keep selling its bread in all of its current markets, he said, and do what it can to reduce its labor costs.

"If you lost Wonder bread in New York, no one would notice," he said, arguing that the company's most valuable products are in the Hostess side of the business.

Alvarez conceded that as people get older, they might be less likely to eat Twinkies or other sweet baked goods, but he emphasized that there is a core audience for such old favorites. "We're selling $3.5 billion of these products," he said. "Someone's eating it."

Alvarez said Interstate plans a thorough review of all its operations to develop a new business plan in what he described as a "very, very intensive period."

Wire services contributed to this article.

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