THOMASVILLE, GA. — While confident Wonder, Home Pride and other recently acquired brands will be a success, the brands have not been back on the market long enough to meaningfully assess, said Allen L. Shiver, president and chief executive officer of Flowers Foods, Inc.
In a Nov. 7 conference call, Mr. Shiver commented on the company’s acquisition of key bread brands and other assets earlier this year of Hostess Brands L.L.C.
“It’s very early in the game,” Mr. Shiver said. “We literally have only been back on the market a few weeks. We are encouraged, and each market is a different story. We are very confident in the long run that Wonder, Merita, Butternut, Home Pride, those brands are going to be very significant parts of our overall product line. We will be able to do a better job next quarter giving you some specific number on how they are performing.”
Net income of Flowers Foods, Inc. in the 12 weeks ended Oct. 5 was $33,888,000, equal to 16c per share on the common stock, up nearly 9% from $31,231,000, or 15c per share, in the same period a year ago. Sales were $878,492,000, up 22% from $717,282,000.
Mr. Shiver explained why assessing the reception of the Wonder reintroduction is taking some time.
“Retailers reallocate their space at set times during the year,” he said. “Working with their schedules, we are continuing to expand our newly acquired brands back into the marketplace. We are pleased with what we have seen so far.”
Asked to identify markets where the reintroduction of Hostess bread brands was going well, Mr. Shiver mentioned California and the Northeast before adding, “I wouldn’t say there’s any region that is stronger than others.”
With pressure on gross margins, Flowers lowered its full-year earnings-per-share guidance to 90c to 93c, down from 92c to 98c. No change was made in the sales guidance, still up 24.5% to 25.5% from 2012.
A significant part of the conference call was devoted to questions about and discussion of margin pressure and its causes. In particular, Mr. Shiver and Steve Kinsey, executive vice-president and chief financial officer, discussed why gross margins have been about three percentage points beneath the company’s 50% target. While pricing pressure and ingredient costs were factors in earlier quarters, integrating the company’s major recent acquisitions, particularly assets of Hostess Brands, Inc., was a significant factor in the third quarter.
“The (Direct Store Delivery) segment absorbed the carrying costs of the Hostess assets we acquired,” Mr. Shiver said. “We also increased marketing spend to support our brands in new markets and to support the relaunch of our acquired brands.”
Spending included other costs, including an expanded organization structure to “support our sales growth and to prepare of the reintroduction of Wonder, Merita, Butternut and Home Pride.”
Mr. Shiver said the elevated costs during the quarter reflected an emphasis on customer service during a period of transition and that target margins would be achieved once again in the future.
“Priority one was making sure that we took care of the marketplace, and we’ve added costs to do that,” he said. “Now as things start to settle down, we are working hard to make sure the organization is right sized and that our costs are in line. The good news is, if you look historically, that’s one of our strengths. We certainly know how to do that.”
A continuing challenge for Flowers has stemmed from higher volume at its plants since November 2012 when Hostess ceased operations. The problem continued in the third quarter of 2013, but Mr. Shiver said improvements have been evident in recent weeks.
Three additional production lines started up during the quarter, and 49 production shifts were added across the company “to support our sales increase,” Mr. Shiver said.
Also during the quarter, a Modesto, Calif., baking plant was acquired.
“That is now providing buns for that state,” Mr. Shiver said. “We also announced that we will soon be producing bread at the Henderson, Nev., bakery.” Production there should commence before the end of the year, Mr. Shiver said.
Commenting further on Flowers’ growth in California, Mr. Shiver said the company’s market share has grown to 12.2% from 1.8% thanks to its acquisition of the Sara Lee business there.
“We now have in place a D.S.D. distribution network that serves all of California,” he said, adding later, “A big part of what is happening in California has been putting the distribution system in place.”
The higher D.S.D. costs did not account for all the margin pressure at Flowers, Mr. Shiver said. A single baking plant in the company’s food service segment struggled with manufacturing efficiencies.
“Our team is also addressing that problem,” he said.
Asked about pricing, Mr. Shiver said Flowers raised prices in the “low single digits” in the third quarter.”
“We have some additional pricing to take as we finish out the year and get in position for 2014,” he said.
Responding to volume trends in bread and food sales in general, Mr. Shiver said he isn’t worried about data indicating modest declines.
“If you look at the category for the quarter, dollars were up about 2% and volume was down about 1%,” he said. “The way I look at the category, you have to be very clear that it’s a huge category. It’s a $31 billion, $32 billion category. The recent trend has been down slightly. But again, the consolidation that is taking place within the industry far outweighs any type of slight downtrend in the overall baked food categories. I’m still very bullish about the future. With the size of the category, the slight downward tick is not that significant.”