After bleeding red ink like jelly from a freshly bitten Krimpet, the makers of Tastykake snacks are faced with a serious question: sell the company at a knockdown price or just mourn uncle under the crippling weight of his debt.
It’s a sad development for the Pennsylvania confectionery powerhouse that originated nearly a century ago in Philadelphia. But what is perhaps most tragic is that the main reason parents Tasty cooking (NASDAQ: TSTY) on the brink of bankruptcy is a development that was intended to straighten out the company’s dilapidated finances.
Specifically, Tasty Baking used $100 million in debt to build and move into a new bakery plant, a move that was expected to deliver significant cost savings over the outdated and inefficient facilities the company had previously used. After moving in last year, the company found savings — sadly, TSTY shareholders expected the modern dig to cut $10 million in expenses in the fourth quarter. He only realized savings of $3 million.
It’s a tough reality for TSTY to face – especially as the company is about to post fiscal 2010 numbers that are sure to post a third consecutive year in the red.
Tasteful executives say lenders will be willing to defer payments on the massive bakery and warehouse construction, and are under the advice of an outside adviser to look at options such as refinancing existing debt or a sale.
But the company also clearly pointed to the problems and subsequent bankruptcy filings of the operator of grocery chains A&P, Super Fresh and Pathmark.
Tastycake may not disappear from the face of the earth in the event of bankruptcy. GM is perhaps the most recent and starkest example of how a company can restructure and emerge from bankruptcy leaner and meaner.
However, it’s hard to be optimistic about the company’s sweets. Inflation drives up the cost of raw materials such as sugar, suggesting even lower margins and revenues for TSTY. And no matter how you slice them, Tastykake treats aren’t a crucial part of a balanced diet, and aren’t a necessary purchase for many families looking to cut back on expenses.
It all adds up to a bitter pill to swallow for one of the legendary bakeries in the northeast.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter at http://twitter.com/JeffReevesIP. As of this writing, he does not hold any position in any of the stocks named here.