Tough market, legal costs weigh on Flowers earnings

by Josh Sosland
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Flowers Foods brands
 Flowers Foods, Inc. earnings drifted downward in the third quarter.

THOMASVILLE, GA. — With its legacy business under continuing pressure and facing higher legal costs, Flowers Foods, Inc. earnings drifted downward in the third quarter. Progress was reported in Project Centennial, the company’s recently launched restructuring initiative.

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%.

Results included a $1.25 million charge related to an agreement to settle a class-action misclassification lawsuit in Connecticut. Flowers settled the lawsuit, related to its Lepage Bakeries subsidiary, after the quarter ended. Flowers said the settlement, which covers 49 Flowers territories and is subject to court approval, is “intended to strengthen and enhance the independent contractor model.”

Alpine Valley Bread, Flowers Foods
Alpine Valley Bread helped boost sales for Flowers.

Helping boost sales was the contribution of Dave’s Killer Bread and Alpine Valley Bread, contributing 4.4 percentage points of growth. The anniversary of the D.K.B. acquisition occurred during the quarter, on Sept. 12. The brand’s performance was a highlight in a generally difficult quarter, said Allen L. Shiver, Flowers president and chief executive officer.

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

“While we are pleased with the performance of Dave’s Killer Bread, which continues to gain share as America’s No. 1 organic bread brand, our results in the third quarter were affected by challenging category dynamics and elevated marketing and legal costs,” he said. “We remain acutely focused on driving growth and increasing efficiencies, including our Project Centennial efforts. The initial diagnostic phase is complete, and we are now finalizing our plans to implement strategies intended to grow sales and improve margins.”

Adjusted EBITDA margin in the third quarter was 11.1%, down 70 basis points from a year earlier.

Earnings before interest and taxes for the Flowers Direct-Store-Delivery Segment was $66,331,000 during the third quarter, down 10% from $73,803,000 in the same period a year earlier. Sales were $768,920,000, up 3%.

Flowers Foods Nature's Own bread and Tastykake cupcakes
Branded bread and branded cake experienced the largest declines.

“Excluding the D.K.B. acquisition until cycled, positive price/mix in the branded retail category was more than offset by volume declines in the category driven by the competitive marketplace,” Flowers said. “Branded soft variety and specialty loaf bread, as well as branded cake, experienced the largest declines, partially offset by growth in branded buns and rolls and store brand loaf breads. Non-retail and other sales decreased primarily due to volume declines.”

D.S.D. segment operating margin was 8.6% in the third quarter, down from 9.9% a year earlier. Profitability benefited from lower input costs and distribution fees, but these factors were offset by higher workforce-related, legal, and marketing costs.

“Outside purchases of D.K.B. products have decreased due to the additional capacity provided by the Tuscaloosa, Ala., bakery conversion, as well as the Alpine bakery in the Warehouse segment,” Flowers said.

Dave's Killer Bread, Flowers Foods
Outside purchases of D.K.B. products decreased due to the additional capacity provided by the Tuscaloosa, Ala., bakery conversion.

Also pressuring D.S.D. results were higher depreciation and amortization expense and a legal settlement charge. A facility closing added another $700,000 in cost during the quarter.

Warehouse Delivery segment EBIT was $12,311,000, up 8% from $11,393,000 in the third quarter of 2015. Sales were $149,871,000, up 8%.

Offering an update on the company’s Project Centennial initiative, Flowers said the diagnostic phase evaluated opportunities to generate growth, cut costs and evaluate investments that could strengthen the company’s competitive position and boost margins longer term.

Dave's Killer Bread thin-sliced organic bread, Flowers Foods
D.K.B.'s performance was a highlight in a generally difficult quarter, Mr. Shiver said.

“In mid-October, Flowers began the second phase, which entails formulating and executing new strategies to capture growth opportunities,” Flowers said. “To fund these initiatives, the company is currently finalizing the specific actions necessary to achieve savings through identified operational improvements that include further use of the company’s shared services capabilities, network optimization, and better leveraging the company’s expenditures on goods and services. The company anticipates finalizing the implementation plans in early 2017, and expects to provide additional details on Project Centennial when Flowers fiscal 2016 results are released in early February.”

In the nine months ended Oct. 8, Flowers net income was $150,734,000, or 72c per share, down 4% from $156,945,000, or 74c, in the first 40 weeks of 2015. Sales were $3,058,168,000, up 4.7%.

No earnings guidance revision was issued as part of the financial results. Adjusted net income per share for the full year is forecast in a range of 90c to 95c.

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