Shiver: 'It's very much of a changing category'

by Josh Sosland
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Tastykake and Home Pride bread
Flowers Foods' conventional branded bread and snack cake categories remain under pressure.
 

THOMASVILLE, GA. — With the company’s core soft variety bread category under considerable pressure, Flowers Foods, Inc. is working intensely to adapt to category changes, said Allen L. Shiver, president and chief executive officer.

In a May 18 conference call with investment analysts, Mr. Shiver highlighted success the company has achieved with its Dave’s Killer Bread line of organic bread as well as areas the company needs to address for broader success moving forward. Those areas include the company’s conventional branded bread and branded snack cake, both of which were sources of weakness during the quarter.

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

“In short, brands that deliver innovation and unique products were the point of difference of growing sales,” Mr. Shiver said of the first quarter’s results.

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 net income was down 11%, and the company said sales for the full year would likely fall toward the low side of guidance.

In trading May 18 on the New York Stock Exchange, Flowers Foods shares fell 6%, closing at $18.33, down $1.07.

“There are some things that are taking place I think with today’s consumer that are influencing the overall category,” he said. “And we’re addressing those, especially with brands like Dave’s Killer Bread as well as looking at different opportunities in the perimeter of the store, the bakery, deli and elsewhere. So it’s very much of a changing category and a changing marketplace. We feel like we’re in very good position to take advantage of it.

Dave's Killer Bread
Strength in the organic marketplace stemmed principally from increased distribution of Dave's Killer Bread.
 

“If you look at the overall fresh bakery category, it’s still a $31 billion category, which is the No. 3 category in the entire supermarket. So even though the category is relatively soft, it’s still extremely large and there’s a lot of opportunity for us to grow this business as we look forward.”

Strength in the organic marketplace stemmed principally from increased distribution of D.K.B., but Mr. Shiver said other forces will be fueling growth ahead.

“Organic breads, which are squarely aligned with today’s consumer trends, are clearly the highlight of the bread category, and we are very excited about the opportunity we have with Dave’s Killer Bread and Alpine Valley,” Mr. Shiver said. “D.K.B. is the leading organic bread brand in the U.S. Early in the second quarter, we launched D.K.B. into the breakfast category with four items.

Dave's Killer Bread breakfast items
Early in the second quarter, Flowers launched D.K.B. into the breakfast category with four new items.
 

“We’re just a few weeks into the launch, but the response so far has been very strong, and we are working on other opportunities to grow this dynamic brand.”

Lagging since its acquisition have been sales of the Alpine Valley organic brand, which Flowers is targeting toward the perimeter, freezer case and in-store bakery areas of supermarkets. Mr. Shiver said efforts to improve Alpine Valley’s results and the overall efficiency of organic operations continue.

“We’ve updated the brand and packaging,” he said. “We’ve introduced new items, and we have invested in additional sales resources. We’re gaining traction, and we’re encouraged by the progress being made. Organic bakeries are running more efficiently, and the margins in this business are in line with expectations. Product quality is high, and utilization rates continue to increase. Now that we’re producing the vast majority of our organic products in-house, we have reduced outside purchases from co-manufacturers, enhanced profitability and improved product consistency and quality.”

Alpine Valley bread
Alpine Valley recently updated its bread packaging.
 

Beyond D.K.B., Flowers’ first-quarter results in bread were checkered.

Overall, the fresh packaged bread category was down 1.1% during the quarter. Pockets of strength Mr. Shiver cited in addition to organic bread were white loaf bread and dinner bread. Across Flowers’ business, reported sales declined 0.9%. Still, the company gained share in bread with particular strength in white loaf and soft variety buns.

“Sales of soft variety and nonorganic wide pan brands in particular have been impacted by consumer trends and competitive activity,” Mr. Shiver said. “The cake category was down 20 basis points in the first quarter. A positive is our share of the category has been stable for the past two quarters after being under pressure during the reentry of a competitor. Tastykake remains a high-potential brand, and we have a strong lineup of new products in the pipeline to drive brand excitement and sales.”

Tastykake products
Tastykake remains a high-potential brand, Flowers said.
 

Mr. Shiver acknowledged D.K.B. alone will not be sufficient if Flowers is to succeed in the next few years.

“Also a priority is to better align our Nature’s Own brand, which is the No. 1 brand in the bread category, with the growing number of millennial families,” he said. “Through research and innovation, we are working to enhance the brand’s consumer appeal.”

Like many companies, Flowers’ has been grappling for years with ways to attract the millennial consumer. In March 2014, the company announced a major relaunch of its Cobblestone brand with an eye toward the millennial demographic. Cobblestone was not discussed in the May 18 conference call.

Cobblestone Bread Co. Swirl bread, Flowers Foods
Flowers' Cobblestone brand is aimed at millennials.
 

While touching only briefly on Flowers’ Project Centennial restructuring program, Mr. Shiver said it is expected the initiative will generate tens of millions of dollars of savings in purchasing.

“We’re also deep into creating a more centralized purchasing function that we expect will generate $45 million of run rate cost savings by 2018,” he said. “To achieve the targets we’ve laid out for 2018, ’19 and beyond, we still have a lot of work to do, but we’re on schedule, and I’m encouraged by the passion and the commitment Flowers team members at all levels are bringing to our Centennial work.”

Responding to a question, Mr. Shiver reaffirmed Flowers’ commitment to the company’s direct-store delivery model for distributing fresh baked foods. Still, he insisted the company was not closing its eyes to opportunities in warehouse distribution.

Nature's Own Life bread
Flowers' Nature’s Own brand is the No. 1 brand in the bread category, Mr. Shiver said.
 

“The success of Dave’s Killer Bread as we’ve rolled it out on D.S.D. really shows the strength of D.S.D. and what we can do with a brand like Dave’s,” he said. “At the same time, we continue to grow in our warehouse model. We’re looking at other portions of the supermarket, the perimeter of the store, the bakery, deli that really lends itself to a different form of distribution.”

One of the tests of Flowers’ new strategies, including stock-keeping unit rationalization, will come later in the year, Mr. Shiver said.

“The fall shelf resets will reflect elements of our streamlined assortment, and we expect our improved promotional management tools to be online in early 2018,” he said. 
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