Shiver: Flowers losing share in soft variety bread

by Josh Sosland
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Nature's Own Life bread, Flowers Foods
Flowers recently launched new better-for-you bread varieties under the Nature’s Own Life brand.

THOMASVILLE, GA. — Even as the company generated growth in other key segments, including white bread, Flowers Foods, Inc. continued to struggle in the soft variety category during the third quarter, said Allen L. Shiver, president and chief executive officer. During a Nov. 10 conference call with analysts, Mr. Shiver reviewed Flowers results, including the company’s “mixed” bread market performance.

As previously reported, Flowers Foods net income in the third quarter ended Oct. 8 was $40,216,000, equal to 19c per share on the common stock, down 8% from $43,796,000, or 21c per share, in the same period a year ago. Sales were $918,791,000, up 3.8%.

Wonder bread and Nature's Own bread, Flowers Foods
Flowers' share in the white loaf segment is led by Wonder and Nature's Own Butter Bread.

In white bread, Flowers has been gaining on competitors, Mr. Shiver said.

Allen Shiver, Flowers Foods
Allen L. Shiver, president and c.e.o. of Flowers Foods

“Led by Wonder and Nature’s Own Butter Bread we are gaining share in the white loaf segment and that segment overall is growing,” he said. “Our organic brands, along with Cobblestone Bread Company, are driving share gains in specialty premium, and we also gained share in the sandwich bun and roll segment. That being said, in the soft variety segment we lost share. And since that is the primary segment for our largest brand, Nature’s Own, it is our team’s top priority to correct course, and those course corrections are under way.”

To remedy the situation for Nature’s Own, Flowers has “returned to a more normal feature activity” level to ensure the brand remains competitive, Mr. Shiver said. Additionally, new better-for-you varieties have been introduced under the Nature’s Own Life brand. The Life lineup includes sugar-free, high fiber, low-calorie, sprouted grain and high-protein varieties.

Still, the bread market overall remains something of an uphill climb. During the quarter, the overall fresh packaged bread market declined 0.5% in dollars and 1.2% in units. Store brand category sales have been especially weak.

Cobblestone Bread Co. Swirl bread, Flowers Foods
Flowers' Cobblestone Bread Co. brand is driving share gains in specialty premium.

“While it is important to monitor the overall category trends, we continue to believe Flowers has the opportunity to outperform the category by gaining share in our expansion markets and investing in brands that are in growing segments of the category,” Mr. Shiver said.

Buttressing the company’s expectations it can outperform the category overall is Flowers’ Dave’s Killer Bread organic brand.

“The market for organic fresh packaged bread is growing, but our brands are gaining share as well,” Mr. Shiver said. “The consumer and retailer response following the nationwide roll-out of D.K.B. has been overwhelmingly positive.”

Dave's Killer bread varieties, Flowers Foods
Flowers acquired Dave’s Killer Bread organic brand in September 2015.

More muted was Mr. Shiver’s analysis of another Flowers’ organic brand — Alpine Valley Bread — distributed through the company’s Warehouse Delivery segment. He said the brand started the year “slower than we had expected.”

“However, we continue to have confidence in our strategy for the brand and believe we are taking the right steps to expand distribution and grow sales,” he said.

The impact of D.K.B. on the Flowers bottom line has been helped both by sales growth and production efficiencies. With the conversion of an Alabama baking plant into an organic facility, Flowers has been reducing the percentage of D.K.B. baked by co-packers.

Alpine Valley Bread bakery, Flowers Foods
The process enhancements made at the Alpine bakery in Arizona have demonstrated improvements in quality, consistency and productivity.

“The Tuscaloosa (Ala.) bakery we converted to organics in the second quarter is hitting its stride,” Mr. Shiver said. “And the process enhancements we’ve made at the D.K.B. bakery in Oregon and the Alpine bakery in Arizona have both demonstrated solid improvements in quality, consistency and productivity.”

By early 2017, Flowers expects to bake “substantially all of our organic breads” in company baking plants.

Citing Information Resources, Inc. data, Flowers said the company’ share of the total organic bread market climbed to 42.4% in the 52 weeks ended  Oct. 9, 2016, up from 37.3% in 2015. The organic bread category as a whole during this period grew to $333.7 million, up 27% for the year from $262 million.

Mrs. Freshley's snack cakes, Flowers Foods
Snack cakes represented a difficult sector for Flowers.

Snack cakes represented another difficult sector during the third quarter. The company lost market share in the convenience store channel “due to a competitive marketplace,” Mr. Shiver said.

“Our focus for the Tastykake and Mrs. Freshley’s brands is to win over consumers, and our cake marketing team has a strong pipeline of new flavors and products,” he said.

The Flowers executives offered additional details about how Project Centennial is progressing, though Mr. Shiver said actions will not be described in great detail until early 2017. Still, he said significant change should be anticipated.

Tastykake winter edition snack cakes and donuts, Flowers Foods
Flowers' focus for its Tastykake brand is to win consumers with new flavors and products.

“My message to the team today is that it is not business as usual at Flowers,” he said. “We are reexamining every detail of our business to find new ways to operate more efficiently while never sacrificing quality or service.”

Asked what “buckets” are part of the focus of the company in its restructuring, R. Steve Kinsey, executive vice-president and chief financial officer, emphasized a couple areas.

“There is going to be a big focus on leveraging our shared service concept,” he said. “Currently we are looking at benefits we think (exist) in the purchasing goods and services area of the company. We have done a good job from a shared service perspective on direct cost, so we are going to look at the buckets of indirect costs. I think you can expect to see some savings potential there in the future. Another big area of focus coming out of the diagnostics is network optimization. It is obvious from a production standpoint we need to make sure we have the right production and the right marketplace. And from an s.k.u. (stock-keeping unit) perspective we want to make sure we have the s.k.u.s that are moving, which also will lead, again, to our focus on stale improvement.”

Cobbleston Bread Co. whole grain bread, Flowers Foods
Cobblestone Bread Co. products have performed well.

While Mr. Shiver said the company had made changes in its levels of retail feature activity for Nature’s Own, he repeatedly said during questions-and-answers that no significant adjustment was taking place with bread pricing overall.

“At the end of the day the consumer sets the price, and we are very encouraged about the growth of especially the organic categories and Cobblestone Bread Company doing really well,” he said. “We are also enjoying growth in underdeveloped markets. We have mentioned markets, New York, Connecticut, on and on. But as far as pricing, those conditions are really pretty stable with the story that we have given you in prior quarters. I think the emphasis now is that we have made adjustments, and those adjustments had found their way into the marketplace pretty much system wide. But (we) do not anticipate any further deterioration of pricing in this category. In fact, we are optimistic that with time pricing will improve. And if you look at our history, we have always been the price leader, especially in those markets where our brands are strongest.”

Flowers has not yet issued earnings guidance for 2017, but Mr. Kinsey said ingredient costs will not be the positive for earnings growth that was the case in 2016.

Alpine Valley Bread, Flowers Foods
The Alpine Valley Bread brand started the year slower than expected, Flowers said.

“While we are expecting some minimal benefit, we are not expecting tremendous cost tailwinds like we saw in 2016,” Mr. Kinsey said. “With respect to workforce, I think you can anticipate to see the traditional low-single-digit increase in overall workforce costs for 2017.”

Regarding 2016 guidance, no formal adjustment was made of the company’s 90c to 95c earnings per share outlook issued three months earlier. Still, Mr. Kinsey suggested earnings toward 90c per share are a more likely outcome than 95c.

“I am not willing to say we are at the lower end, but we are trending toward that direction,” he said.
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