Credit Watch: Hearthside Food Solutions Files for Bankruptcy
December 21, 2024
The food and beverage industry is struggling amidst economic challenges, supply chain snags, and mounting regulations. These factors are creating a rocky landscape filled with risk and declining sales.
Major brand names are feeling the crunch: Kraft Heinz reported a 2.4% drop in organic sales, while Hershey’s North America confectionery segment plunged by a jaw-dropping 22%. These numbers underscore the broader pressures reshaping the landscape, leaving companies scrambling to adapt.
A Key Player at Risk
One key player navigating through the storm is Hearthside Food Solutions, the largest privately held bakery in the U.S. Founded in 2009, Hearthside specializes in a wide range of baked goods. They partner with major brands—like Kraft Food, General Mills, and PepsiCo—on high-volume, short-run products.
Hearthside has a significant production network of 28 facilities and a workforce of 12,100 employees. While secured first-lien holders will receive 100% of amounts due, unsecured creditors will recover up to 6%.
Hearthside Files for Chapter 11
On November 22nd, 2024, H-Food Holdings LLC, the parent company of the snack-making manufacturer, filed for Chapter 11 bankruptcy protection after struggling to refinance its substantial debt, which exceeds $1.9 billion.
A restructuring agreement was put in place to “right size” its balance sheet and secure $200 million in new equity capital when ready. This was done in an effort to stabilize operations. However, vendors should remain vigilant of continued risk.
Factors that Led to Financial Distress
A number of factors over the last two years painted a less-than-rosy picture of the snack-maker, including:
Inflation and Rising Costs: Like many companies, the cost of raw materials and production is being driven up. Increases in operational costs squeezed profit margins and the ability to remain financially stable.
Labor Instability: Shortages, particularly in 2022, were further exacerbated by inflation and supply chain issues. Operational inefficiencies consumed the business, particularly due to the longer training periods required for bakery operations.
Consumer Demand Shifts: Rising prices in the food and beverage sector has led to customers opting for lower-cost alternatives or private label products. This shift has negatively impacted businesses like Hearthside who rely on innovation and high volume sales.
Operational Struggles: A significant drop in revenue—nearly 11% year-over-year in recent quarters—are a direct reflection of the aforementioned operational issues and external market pressures where consumers are cautious about spending.
A combination of strategic adjustments, cost management, and innovation will be crucial to regaining stabiliting moving forward.
Distress Signals Cloaked in Scoring
Up until the bankruptcy filing, traditional credit bureaus weren’t signaling severe risk. Hearthside maintained a higher score compared to the industry average.
Source: CreditSafe
While DBT has been creeping up since June 2024, it was still below the industry average. And due to the cloaking effect, distress signals beginning to take shape below were hidden at the surface.
Source: Credit Pulse
The Hidden Factors for Early Detection
When you take apart the last 24 months, the signs of distress were more obvious than what was reflected on the surface. Below are the top hidden factors found
High Debt Levels: The company has accumulated over $1.9 billion in debt, placing a substantial burden on its financial resources.
Negative Press. In February 2023, the New York Times exposed the company in its article on child labor issues. Shortly after, the U.S. Department of Labor investigated allegations of underage workers in unsafe conditions at its facilities.
Recent Revenue Decline: In the second quarter of 2024, Hearthside reported a 14% year-over-year decrease in net revenue, falling from $969.8 to $833.4 million. Trends persisted into the third quarter with an 11% year-over-year decline.
Employee Retention Trends. With a median employee turnover rate slightly below the national average, headcount growth flattened while executive turnover trends arose. Senior leadership changed hands as multiple key hires were made over the last 24 months.
Facility Closures: In July 2024, the company announced the closure of its baked bars facility in Nashville, affecting 229 jobs, as per a Worker Adjustment and Retraining Notification (WARN) notice filed with the state.
Getting in front of potential issues helps vendors mitigate risk for their company. Here’s how you can identify risky business and protect your company finances.
Continuous Monitoring: Establish a system for frequently monitoring financial indicators—such as financial indicators, WARN notices, and adverse media—which can signal financial distress.
Urgent Credit Review: As soon as you identify suspicious behavior, perform an immediate review of the company in question.
Reduce Exposure: Take proactive measures to aggressively reduce credit limits to companies who may be unable to maintain operations or pay back loans.
Secured Credit Arrangements: If continuing business with at-risk customers, prioritize securing credit arrangements, or those backed by collateral. This helps to safeguard interests amid heightening risk.
Tighten Payment Terms: Implement tighter payment terms or require cash in advance for new transactions to minimize financial risk.
Leverage Technology: Like Credit Pulse!
Empower your credit team to stay ahead of risk with our AI-driven monitoring platform. By blending robust data with advanced machine learning, we deliver predictive insights for proactive customer oversight and streamlined credit reviews.
The result?Smarter, faster decisions powered by continuous monitoring and actionable intelligence—helping you mitigate risk and seize opportunities with confidence.
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