Flowers results undercut by Warehouse Division slide

by Josh Sosland
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Flowers Foods Nature's Own delivery truck
A 10% volume drop in the Warehouse Delivery segment of Flowers Foods pushed sales and earnings downward in the company’s second quarter.
 

THOMASVILLE, GA. – A 10% volume drop in the Warehouse Delivery segment of Flowers Foods, Inc. pushed sales and earnings downward in the company’s second quarter ended July 15.

In connection with the quarterly results, Flowers revised downward its financial guidance for 2017. The company also offered an update on its Project Centennial restructuring program.

Flowers net income in the second quarter was $44,740,000, or 21c per share on the common stock, down 13% from $51,155,000, or 24c per share, in the second quarter of 2016. Sales were $926,639,000, down 0.9% from $935,025,000.

Adjusted net income was down 8%.

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

“We continue to take decisive action to focus on the consumer and become a more efficient, streamlined organization,” said Allen L. Shiver, Flowers Foods president and chief executive officer. “Our portfolio of bread brands, bolstered by the strength of Dave’s Killer Bread (D.K.B.), continues to gain market share and improve our competitive position. In our cake business, we are taking action to address share losses and improve profitability. Our business is generating strong free cash flow and supporting shareholder returns, our solid financial position and strategic investments.”

Results of the Flowers’ Direct-Store-Delivery segment were nearly flat in the second quarter. Earnings before interest and taxes were $79,564,000 in the second quarter, down 0.7% from $80,135,000 in the second quarter of 2016. Sales were $792,892,000, up 1.3% from $785,767,000.

Year-to-date EBIT in the segment was $166,958,000, down 2.9%. Sales were $1,792,752,000, up 0.4%

Flowers Foods Dave's Killer Bread bagels
The addition of Dave's Killer Bread breakfast items helped boost sales for the brand.
 

Store branded retail sales rose 4.1% while non-retail and other sales fell 1.7%, Flowers said.

“Branded retail sales increased due to growth of branded organic products, mostly offset by declines in other branded items, largely buns and rolls and cake,” Flowers said. “The company continues to see substantial growth of the D.K.B. brand from both volume and price, despite having cycled the national roll-out of the brand at the beginning of the quarter. Furthermore, the addition of D.K.B. breakfast items, introduced during the quarter, contributed to the increase. Store branded retail sales increased primarily due to gains in buns and rolls. Non-retail and other sales decreased primarily due to volume declines in food service, partially offset by positive pricing/mix.”

Warehouse Delivery segment EBIT was $11,589,000 in the second quarter, down 26% from $15,710,000 in the second quarter of 2016. Sales were $133,747,000 down 10%, from $785,767,000.

Flowers Foods Dave's Killer Bread cinnamon raisin bread
Dave's Killer Bread debuted new cinnamon raisin bread in March.
 

Year-to-date EBIT in the segment was $56,284,000, up 63% from $34,451,000 in the first half of 2016. The 2017 figure included a one-time divestiture gain of $28.9 million in connection with a mix manufacturing plant. Sales were $321,536,000, down 9% from $354,607,000. 

While Flowers in recent months has described steps it is taking to bolster its Alpine Valley organic bread business as well as its snack cake sales, both saw sales declines during the quarter, Flowers said.

“Branded retail sales declined 18.1% to $33.7 million, store branded retail sales decreased 17.4% to $24.2 million, while non-retail and other sales decreased 3.7% to $75.8 million,” Flowers said. “Branded retail sales decreased largely due to volume declines in both cake and organic bread. During the second quarter of fiscal 2016, the Warehouse segment’s Mesa (Arizona) 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. Branded cake sales were negatively impacted by increased competition quarter over quarter. 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 and, to a lesser extent, lost contract manufacturing business, partially offset by volume gains in food service sales.”

Flowers Foods Alpine Valley bread
While Flowers has taken steps to bolster its Alpine Valley organic bread business, the brand sales declines during the quarter.
 

Breaking down the 10% sales decline in the quarter, a 9.6% drop in volume was the principal contributor with another 3% drop related to the divestiture of a mix plant. Pricing/mix represented a 2.2% positive offset.

With second-quarter results in the books, Flowers lowered its sales guidance for the year to $3,888 million to $3,927 million, flat to down 1% from 2016. The company’s previous guidance was $3,927 million to $4,006 million.

Earnings per share are forecast at 85c to 90c, versus its previous forecast of 85c to 95c.

“We are executing on our strategic priorities under Project Centennial,” Mr. Shiver said. “During the quarter, gross margins increased, and manufacturing efficiencies improved. Our cost savings initiatives moved forward in line with our expectations, and we began transitioning to a new, lower-cost, performance-driven structure designed to better address the changing consumer and operating environment. We’re on track with our progress, but as our updated guidance reflects, we are realistic about the evolving consumer environment. Our team is driving hard to build shareholder value by reducing costs, strengthening the core business, and capitalizing on growth opportunities within the large bakery category.”

Flowers Foods Tastykakes minis
Flowers' snack cakes business experienced sales declines during the quarter.
 

In an update on Project Centennial, Flowers highlighted second-quarter accomplishments in three areas:

  • Enhancing efficiency: A new organizational structure and initiation of a voluntary separation incentive program; progress toward reducing purchased goods and services spending by at least $45 million by fiscal 2018; “distributor enablement initiatives” to reduce stales; completion of a “first wave of continuous improvement pilot programs” that revealed efficiency savings opportunities in baking plants; launch of a process to rationalize the company’s  manufacturing and logistics network; and after the quarter, announcement of plans to close a snack cake plant in North Carolina in early October.
  • Strengthening the company’s core business: Progress in a brand rationalization effort, to be completed before the end of 2017; extended Dave’s Killer Bread into the breakfast segment with the launch of bagels and breakfast items; and engaged third-party platform to efficiently expand distribution of fresh products to new markets in the Upper Midwest.
  • Expansion into adjacencies: Formulated strategy and began to identify opportunities to diversify brand portfolio into attractive adjacent categories.
In the 28 weeks ended July 15, Flowers Foods net income was $105,158,000, or 50c per share, down 5% from $110,518,000, or 52c. Sales were $2,114,288, down 1.2% from $2,139,377,000. 
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