Flowers feels pressure from Hostess cake relaunch

by Josh Sosland
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THOMASVILLE, GA. — Facing “challenging” comparisons with year-ago figures due to the relaunch of Hostess snack cakes in 2013, quarterly sales at Flowers Foods, Inc. rose modestly while adjusted earnings edged downward.

Net income at Flowers Foods in the first quarter ended April 19 was $61,066,000, equal to 29c per share on the common stock, down 45% from $112,026,000, or 53c per share in the first quarter of 2013. Net sales were $1,159,760,000, up 2.6% from $1,130,810,000 a year earlier.

Excluding a $50.1 million bargain purchase price gain during the year earlier period, net income in the first quarter of 2014 was down 6%.

Gross margin during the quarter was 48.6%, an improvement of 40 basis points from the first quarter of 2013. Lower ingredient costs as a percentage of sales was the principal driver of the improvement.

“Partially offsetting the ingredient decreases were lower manufacturing efficiencies and carrying costs associated with the acquired Hostess facilities,” Flowers said.

Allen L. Shiver, president and chief executive officer, highlighted a number of positives at Flowers during the quarter and remained upbeat about the company’s snack cake performance.

“The D.S.D. segment delivered solid sales growth and operating results, despite added costs associated with the Hostess acquisition, start-up of added production capacity, and new market expansion,” he said. “Our acquired bread brands drove share gains, especially in new markets. As previously discussed, the warehouse segment has experienced pressure since the return of Hostess cake to the market in mid-July 2013. However, we are pleased to have maintained a significant portion of the total cake business we gained following Hostess’ liquidation in November 2012.

“In March, we announced plans for the closed bakeries we acquired from Hostess. We have listed nine closed bakeries and 21 warehouses for sale.  When those transactions are completed, annual carrying costs for the Hostess facilities will be reduced by approximately $10 million. In addition to the two bakeries we recently put into production, we expect to open another five or six over the next few years, as determined by market demand. As we continue to expand our D.S.D. markets, we will strategically open acquired bakeries to leverage volume and share gains more rapidly than in the past.”

In a breakdown of results by segment, EBIT was $96,782,000 for the Direct-Store-Delivery Segment, down sharply from $151,496,000 a year earlier but down only slightly adjusted for the $50.1 million bargain purchase gain.

“During the quarter, the company’s D.S.D. sales increased 5%, reflecting volume gains of 2.2%, positive net price/mix of 1.3%, and contributions from the Sara Lee/California acquisition of 1.5%,” Flowers said. “The acquisition was cycled in the second month of the quarter. The volume increase was primarily the result of increases in the branded white bread and branded soft variety bread categories, partially offset by decreases in branded cake. The positive net price/mix was primarily driven by pricing in certain channels.

“Income from operations for the D.S.D. segment was $96.8 million, or 10% of sales for the quarter compared to $101.4 million, or 11% of sales, in last year’s first quarter, excluding the bargain purchase accounting gain. Carrying costs of $6.8 million related to the acquired Hostess facilities negatively affected income from operations by 70 basis points in the first quarter this year. Decreased manufacturing efficiencies compared to the year-ago quarter and costs associated with new market expansion also had a negative effect on income from operations.”

Shifting snack cake market dynamics were especially evident in the Warehouse Delivery segment. EBIT in the segment was $14,109,000, down 23% from $18,403,000. Sales were $190,795,000, down 8% from $208,048,000.

“Sales through warehouse delivery decreased 8.3%, reflecting positive net price/mix of 2.6% and volume decreases of 10.9%,” the company said. “Overall, the positive net price/mix was driven by a favorable mix shift. The volume decrease was driven by decreases in the branded cake, store brand cake and vending categories.

“Income from operations for the warehouse segment was $14.1 million, or 7.4% of sales for the quarter, compared to $18.4 million, or 8.8% of sales in last year’s first quarter. This decrease was due primarily to a decline in sales volumes.”

Offering an update on guidance for the balance of 2014, R. Steve Kinsey, executive vice-president and chief financial officer, said the first half of 2014 “offers challenging year-over-year comparisons for Flowers’ cake business due to Hostess’ cake relaunch in mid-2013 and the carrying costs for the acquired facilities.”

Despite the challenging start, Flowers said it continues to expect 2014 sales of $3.976 billion to $4.126 billion, up 6% to 10% from 2013.  Similarly, the company’s earnings per share target was left unchanged at 98c to $1.05 per share, up 7.7% to 15.4% (in a 53-week fiscal year). Capital expenditures for 2014 are forecasted to be $95 million to $100 million.

“In the near term, added costs associated with our rapid geographic growth impact margins to some extent,” Mr. Shiver said. “However, our team believes Flowers’ expanded D.S.D. footprint will help us reach our stated sales, earnings, and margin goals over the longer term. Our recent investments, combined with our decades long commitment to developing efficient bakeries, strong brands, effective distribution, and an experienced team, position Flowers Foods well for the future.”
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