Flowers confident on outlook in spite of market pressure

by Morton Sosland
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THOMASVILLE, GA. — While heightened competitive activity required Flowers Foods, Inc. to promote its products more aggressively in several markets, the company is still poised to hit its sales and earnings guidance, said George E. Deese, chairman, president and chief executive officer.

Mr. Deese commented on the outlook during a May 27 conference call in connection with the release of first-quarter financial results. Earnings at Flowers Foods in the first quarter ended April 25 were $37,381,000, equal to 40c per share on the common stock, up 4.5% from $35,783,000, or 39c per share, in the same period last year.

Despite the gain, earnings per share fell just short of analysts’ expectations of 41c per share, and the company’s stock fell nearly 8% in early New York Stock Exchange trading on May 27.

Net sales were $807,007,000, up 19% from $676,707,000 in the first quarter offiscal 2008. The jump in sales was attributed to a 12 percentage point gain from acquisitions, a 6.8 point boost from favorable pricing/mix and a 0.5 point gain in volume. Flowers said the strong sales reflected strength in its branded retail business, which grew 15% in the quarter.

"We are pleased with the results this quarter," Mr. Deese said. "Our team delivered sales growth in excess of 19% and earnings in line with our expectation in spite of headwinds from the economy and competitive pressures. We are particularly pleased with the results considering we faced continued challenges in the quarter from higher input costs compared to the same time frame last year. Our branded retail sales grew 14.8% in the quarter, evidence that Flowers’ brands are performing well in recessionary conditions and a testament to our product quality, brand strength and execution in the marketplace."

Gross margin in the first quarter was 46.8% of sales, versus 48.3% in the same quarter in 2008. The decrease in margin was due primarily to an increase in ingredient costs, Flowers said, though start-up costs associated with the company’s new bakery in Bardstown, Ky., also was a factor in the decline.

Elaborating on competitive activity in the marketplace, Mr. Deese recalled that he had noted in the company’s February conference call that Flowers would be "watching the market closely" and would step up promotions if needed.

"By mid-quarter we did add promotional pricing in many markets, and we continue to do so where marketing conditions warrant," he said.

He was quick to point out that the promotional activity was not triggered by a large consumer move toward private label. To the contrary, he said the baking industry continues to perform well versus other parts of the food industry when it comes to branded product preserving market share. He spoke at some length about Flowers’ experience with store brands in the markets it serves.

"In the I.R.I. (Information Resources, Inc.) South market, private label brands have about a 40% share of units and about a 25% to 26% share of dollars, and that is roughly the level it has been for a number of years," he said. "In other food categories, private label growth has been characterized as dramatic over the past year."

In bread, private label gained less than one point in dollar and unit sales over the past year, he said.

With the growth of its branded business over time, Mr. Deese said private label has come to account for a small percentage of the company’s sales — 16% in the first quarter.

Mr. Deese said he had been asked by analysts whether the stepped-up promotional activity would "threaten" the company’s ability to hit its earnings guidance.

He expressed optimism that the company had a wide range of tools to "offset any earnings dilution from promotional activity."

Looking forward, Mr. Deese said heavier promotions likely will continue until market conditions begin to "level out," but he added, "I personally don’t think any of this is long lasting."

In a breakdown of results by segment, first-quarter EBIT (earnings before interest and taxes) was $56,930,000 in the Direct-Store-Delivery segment, up 7% from $53,392,000 in the same period a year ago. Sales were $668,275,000, up 21%.

Mr. Deese said internal sales data show the company’s products and brands outperforming the fresh bread category overall. The company’s Whitewheat and Nature’s Own brands "achieved strong growth." He was particularly pleased by the brands’ acceptance in the company’s new western markets.

In the company’s Warehouse Delivery segment, EBIT in the quarter was $14,224,000, up 72% from $8,259,000. Sales were $138,732,000, up 12%.

Flowers left its projected sales growth for the full year unchanged at 12.6% to 14.5%, with acquisitions accounting for 7 or 7.5 points of the increase. Sales for the year are expected to total $2,720 million to $2,765 million. Earnings per share were forecast at $1.37 to $1.48, which would represent a gain of 7% to 16% from fiscal 2008.

This article can also be found in the digital edition of Milling and Baking News, June 2, 2009, starting on Page 1. Click here to search that archive.

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