THOMASVILLE, GA. — Flowers Foods, Inc. is raising prices, a move that will begin boosting the company’s profitability in the fourth quarter of 2012 and will be even more beneficial in the first quarter of 2013, said R. Steve Kinsey, chief financial officer, Flowers Foods.
Mr. Kinsey made comments about the pricing in a Nov. 9 conference call with investment analysts. It was the second time in recent weeks a major baker has announced plans to raise prices. Bimbo Bakeries USA said in late October it was initiating price hikes in anticipation of higher commodity costs.
Mr. Kinsey and other Flowers executives spoke at some length during the call about the difficult competitive environment evident through much of 2012.
As previously reported, net income of Flowers Foods, Inc. in the 12 weeks ended Oct. 6 was $31,231,000, equal to 22c per share on the common stock. Earnings were nearly unchanged from $31,019,000, or 23c per share, during the third quarter of 2011. Sales were $717,282,000, up 6% from $675,369,000. Results in the 2012 quarter were adversely affected by one-time charges in connection with acquisitions.
In his remarks, George E. Deese, chairman and chief executive officer of Flowers, echoed common refrains from earlier calls.
“Over the long term, our goal is to deliver double-digit earnings growth,” he said. “Our earnings remain under pressure from elevated commodity costs, and volume is soft as consumers remain constrained due to the economy. The result has been a highly competitive promotional marketplace. Our management team continuously focuses on these highly elevated and volatile grain prices. We will continue to monitor our industry consolidation and participate when an acquisition can add to our strength and reward our shareholders.”
Mr. Kinsey elaborated on how marketplace conditions developed over the course of 2012.
“Beginning in the second quarter of this year, we began to see significant changes in the competitive environment through strong promotional activity,” he said. “That continued and increased in the third quarter. However, as Allen (Shiver, Flowers president) will discuss in a moment, we have initiated pricing actions in the fourth quarter. Though these pricing actions will provide incremental benefit in the fourth quarter of 2012, the full benefit will not be realized until the first quarter of 2013.
“We are not prepared to discuss full-year 2013 guidance today; however, the pricing actions taken in the quarter are expected to cover the first half of 2013, provided there are no significant moves in our major input-cost projections.”
Mr. Shiver added a bit of detail into the pricing action and offered considerable insight into how Flowers has fared in the bread and cake markets.
“Our team has begun taking pricing to address the higher costs that we face in 2013,” Mr. Shiver said. “In addition to the increased pricing, we are reducing the frequency and the depth of our promotional activity.”
Mr. Shiver said a slump in the bread market overall has been continuing for a few years now, but he added that Flowers has done well competitively in the market amid these challenges.
“In the quarter, the fresh bakery category experienced a 1.4% decline in units in the South market and a 2.1% decline in units for the total U.S.,” he said. “Dollar sales in the category were down 1.1% in the South and 2.5% in the total U.S. We are pleased to report that Flowers-branded units outperformed the market. Our units were up 1.5% in the South and up 2.3% in the total U.S. Our dollar sales were up 0.7% in the South and up 1.1% in the total U.S. Our internal data show that Nature’s Own soft variety breads performed even better with units up 4.9% and dollars up 4.6%. Consumers continued to seek products that offer a better health and nutrition profile. Nature’s Own has always been positioned for that consumer, and new items that we introduce under Nature’s Own must fit that brand profile.”
Drilling deeper into data from SymphonyIRI Group, Mr. Shiver said Flowers gained share in the South, climbing to a 25.9 share in units and 21.9 share in dollars.
“Similar increases in our market share were achieved in the total U.S., where we hold a 10.9 share of dollars and a 9.7 share of units,” he said. “Our total food service business, which includes D.S.D. and warehouse, was up 8.6% in the quarter. Food service industry projections continue to call for approximately 4% growth in 2012. We continue to be optimistic about the growth of our food service business.”
Turning to the company’s snack cake business, Mr. Shiver said the Tastykake brand has been a good fit for Flowers since the acquisition of Tasty Baking Co. by Flowers in 2011.
“We see great growth potential for Tastykake in our core markets as consumer acceptance of the brand continues to grow,” Mr. Shiver said. “Since September 2011, we have introduced the brand in Flowers’ territories throughout the South and the Southwest. Today, Tastykake is available in 70% of A.C.V. (all commodity volume), compared to our Nature’s Own brand, which has a 97% A.C.V. in the South Census region. We continue to gain space for Tastykake, and we certainly have plenty of room to grow our share in the $4 billion cake category.”
Construction of a new bread line at Flowers’ Oxford, Pa., baking plant, acquired from Tasty, is “going according to plan,” Mr. Shiver said.
“We are scheduled to begin bread production in Oxford by late spring 2013,” he said.
In questions and answers with analysts, Mr. Shiver said Flowers is revisiting the gluten-free market.
“We tested gluten free about two years ago in the Atlanta market fresh delivery and discontinued the test,” he said. “But quite frankly, with the current consumer trends, we’re looking at it again. We don’t have any firm plans today to enter into another market test, but it is certainly a consumer trend that’s very high on the radar, and we’re trying to determine the appropriate next step. So, we’re focused on gluten free.”
Commenting on the company’s Warehouse Delivery business, which saw much more modest sales and EBIT growth than the Direct-Store-Delivery segment, Mr. Shiver said Flowers was continuing to reshape the business with an eye toward profitability.
“We are keenly focused on achieving better margins for that business by exiting lower-margin contract business and moving steadily to higher-margin retail business,” he said.