Flowers' growth prospects dimmed by tough quarter

by Josh Sosland
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Dave's Killer Bread
Flowers Foods enjoyed strong sales of its Dave’s Killer Bread brand.
 

THOMASVILLE, GA. — Weak first-quarter sales have prompted Flowers Foods, Inc. to forecast full-year sales at the low end of its earlier 2017 guidance. While the company enjoyed strong sales of its Dave’s Killer Bread brand, the gains were more than offset by sales decreases in several other parts of its business.

Flowers net income in the first quarter ended April 22 was $60,418,000, equal to 29c per share on the common stock, up 1.8% from $59,363,000, or 28c per share, in the same period a year ago. Sales were $1,187,649,000, down 1.3% from $1,204,3352,000.

Adjusted for special items, net income was down 11% in the quarter versus the first quarter last year. During the quarter the company recorded Project Centennial consulting costs of $15.4 million, a gain on the divestiture of a mix manufacturing business of $28.9 million, net lease termination costs of $600,000, and a legal settlement of $250,000.

“Overall softness in the fresh bread category, a competitive marketplace and the divestiture of the mix manufacturing business resulted in the consolidated sales decline, partially offset by increased sales of the D.K.B. branded products,” the company said. “The national roll-out of the D.K.B. brand on Flowers’ D.S.D. (direct-store delivery) network occurred at the beginning of the second quarter of fiscal 2016 resulting in significant sales growth of the brand, year over year.”

Dave's Killer Bread, Nature's Own, Wonder bread
During the first quarter, Flowers gained share in its key segments of the bread category with Dave’s Killer Bread, Nature’s Own, and Wonder.
 

Overall bread and cake branded retail sales decreased 1% to $693.6 million, while store branded retail sales increased 0.5% to $172 million. Especially weak were non-retail and other sales, off 3.2% to $322 million.

“The decrease in the branded retail category resulted from price/mix declines in soft variety bread and volume declines in cake and other branded retail products, somewhat offset by increased sales of organic bread,” Flowers said. “The increase in store branded retail sales was mostly attributable to volume increases for variety bread and buns and rolls, partially offset by volume decreases for cake. The impact of the mix manufacturing business divestiture, as well as decreases in volume, resulted in the decline in the non-retail and other category, which includes contract manufacturing, vending and food service.”

Allen L. Shiver, president and chief executive officer, acknowledged difficult market realities but also said the company was well situated.

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

“Our competitive position remains solid as we navigate a difficult marketplace,” Mr. Shiver said. “During the first quarter, with Dave’s Killer Bread, Nature’s Own and Wonder, we gained share in our key segments of the bread category. We also delivered lower production costs as a percentage of sales, the result of investments in capacity and improved manufacturing efficiencies. In early May, we launched four organic breakfast items to expand offerings under the D.K.B. brand.”

In view of the category weakness year to date, Flowers said its sales in 2017 are now expected to fall toward the low side of the company’s forecast of $3,927 million to $4,006 million. At the low end, the company’s sales would be flat from the year before.

“Adjusted diluted earnings per share are now expected to be in the middle of the previously provided range of 85c to 95c, excluding the gain on the sale of the Cedar Rapids, Iowa, mix plant of 9c per share, and costs associated with Project Centennial of approximately 7c to 9c per share,” Flowers said.

Dave's Killer Bread breakfast items
In early May, Flowers added four organic breakfast items to its D.K.B. brand lineup.
 

Mr. Shiver said revenue growth will be a key moving forward.

“Our top priority is to create value for our shareholders by driving sustainable, profitable sales growth, while improving our operational efficiency,” he said. “This priority is the focus of Project Centennial. We are on track with our work to streamline the brand assortment, reduce costs for purchased goods and services, and enable independent distributors. Earlier this month, we announced plans to change our organizational structure to support greater brand growth, accountability, operational efficiency and our long-term strategy. I'm confident these efforts, and the others outlined under Project Centennial, will deliver value to shareholders in line with our long-term goals.”

The company said considerable progress was made in its Project Centennial restructuring, including:

  • Market assortment/stock-keeping unit rationalization;
  • Increased engagement with independent distributor partners;
  • Development of forecasting and trade promotion management capabilities;
  • Launch of continuous improvement pilot programs at key bakeries; and
  • Implementation of new policies and procedures designed to lower the cost of purchased goods and services.

Flowers said it will be transitioning to its new structure over the next several months with full implementation expected during fiscal 2018 (see Milling & Baking News of May 9, Page 18).

EBIT of the Flowers D.S.D. segment was $87,394,000 in the first quarter, down 5% from $91,949,000. Sales were $999,860,000, up negligibly from $999,003,000.

Dave's Killer Bread
Flowers' branded retail sales rose 0.6%, private label sales rose 3.4% and non-retail and other sales decreased 3.5%.
 

Branded retail sales rose 0.6%, private label sales rose 3.4% and non-retail and other sales decreased 3.5%.

“The branded retail category increased due to significant sales growth of the D.K.B. brand through its national rollout in our D.S.D. markets,” the company said. “Partially offsetting this increase were declines in branded soft variety bread on lower pricing/mix and volume declines for other branded retail items. Store branded retail sales increased primarily due to volume gains in variety bread and buns and rolls. Non-retail and other sales decreased primarily due to volume declines, partially offset by positive pricing/mix.”

Warehouse Delivery segment EBIT was $44,695,000, up sharply from $18,741,000. The results included the $28.9 million gain from the divestiture. Sales were $187,789,000, down 8% from $204,349,000.

“Decreased sales of snack cakes and Alpine Valley branded organic breads, and the impact of the mix manufacturing business divestiture resulted in the sales decrease in the Warehouse segment,” the company said. “Warehouse segment branded retail sales declined 18.6% to $47.5 million, store branded retail sales decreased 9.8% to $34.5 million, while non-retail and other sales decreased 2.7% to $105.8 million. Branded retail sales decreased largely due to volume declines in cake and organic bread. During the second quarter of fiscal 2016, the Warehouse segment’s Mesa, Ariz., bakery significantly increased production of D.K.B. products for the D.S.D. segment. These intercompany sales are not included in the amounts above, but are included in the D.S.D. segment. Higher promotional activity in the prior-year quarter, and increased competition in the current year, negatively impacted branded cake sales. Store branded retail sales decreased mainly due to volume decreases in cake. The decrease in non-retail and other sales, which includes contract manufacturing, vending and food service, was due primarily to the mix manufacturing business divestiture, partially offset by volume gains in food service sales.”
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