Stronger fourth-quarter sales buoys Flowers' outlook

by Josh Sosland
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Nature's Own bread, Flowers Foods
Flowers Foods' net income in 2017 was $150,120,000.
 

THOMASVILLE, GA. — Riding on the momentum of improved fourth-quarter sales trends and a year of major transition, Flowers Foods, Inc. is “well positioned for a promising 2018,” said Allen L. Shiver, president and chief executive officer of Flowers.

Net income in the year ended Dec. 30, 2017, was $150,120,000, equal to 71c per share on the common stock, down 8% from $163,776,000, or 78c per share, in 2016. Net sales were $3,920,733,000, nearly unchanged versus $3,926,885,000 the year before. Adjusted net income was down 3.8%.

In the fourth quarter, net income was $78,533,000, or 37c per share, up sharply from $13,042,000, or 6c. Net sales were $873,623,000, up 0.6% from $868,717,000 in the final quarter the year before.

The company recorded a gain of $48.2 million in the fourth quarter related to a revaluation of its net deferred tax liability in the wake of the Tax Cuts and Jobs Act. Adjusted for special items, earnings per share in the fourth quarter were unchanged for the same period a year earlier. Adjusted EBITDA declined 0.7%, and adjusted EBITDA margin was down 10 basis points, to 10.4% of sales.

Also during the quarter, special restructuring charges and a pension plan settlement aggregated $5.2 million, versus more than $25 million in special charges at the end of 2016.

Dave's Killer Bread breakfast products, Flowers Foods
Sales of Dave’s Killer Bread were lifted by the introduction of breakfast items last year.
 

Flowers credited sales growth in the fourth quarter to strong demand for its branded organic baked foods and geographic expansion in the face of a competitive marketplace, the cycling of certain promotions and the divesture early in 2017 of a mix manufacturing business. Sales of Dave’s Killer Bread were lifted by the introduction of breakfast items under the brand during the year, Flowers said.

“On a consolidated basis, branded retail sales increased 1.4% to $507 million, and store branded retail sales decreased 0.6% to $127.4 million, while non-retail and other sales decreased 0.5% to $239.2 million,” Flowers said. “The sales increase in the branded retail category resulted primarily from increased sales of branded organic products, partially offset by volume declines in branded loaf breads, snack cakes, and buns and rolls. Store branded retail sales decreased primarily as a result of volume declines in loaf breads, offset partially by increased sales of buns and rolls. The impact of the mix manufacturing divestiture in the first quarter of fiscal 2017 somewhat offset by volume growth in vending and food service sales, principally resulted in the decrease of non-retail and other sales, which includes contract manufacturing, vending and food service.”

Direct-store delivery sales rose 1.1% in the fourth quarter, to $738.6 million. The gain included a 3.4% boost from pricing/mix, offsetting a 2.3% volume decline. Branded loaf bread, snack cakes and buns and rolls suffered volume declines.

In the company’s Warehouse segment, sales declined 2.3%, to $135.1 million.

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

“Our team delivered solid sales growth and great products and service in the fourth quarter, with consumer demand for organic Dave’s Killer Bread driving top-line growth and offsetting a challenging marketplace for traditional bakery items,” Mr. Shiver said. “This was achieved in a quarter where we implemented new roles and responsibilities as part of our revamped organizational model. We also made headway in improving manufacturing efficiencies, lowering selling, distribution and administrative costs, while removing complexity from the business. These improvements, along with lower net interest expense and strong cash flow, enabled us to offset higher workforce-related expenses, reduce debt and support dividend growth.”

For fiscal 2018, Flowers projected sales of $3,921 million to $3,982 million, which would be between flat and up 1.6% from 2017. The company forecast diluted earnings per share of $1.04 to $1.16, a range 17% to 30% higher than 2017. Between 15c and 17c per share of the earnings improvement may be attributed to the effects of the lower effective tax rate Flowers will pay in 2018 because of the corporate tax rate reductions approved by Congress in 2017. Excluding the tax rate effect, Flowers was forecasting earnings in 2018 will be flat to up 10% from 2017.

Fleshing out the assumptions underlying the company’s 2018 guidance, Flowers said sales gains that will result from increased brand investment are expected to be evident primarily in the second half of the year. Additionally, while input cost inflation is expected to reach $40 million, pricing actions taken at the start of the year are expected to provide an effective offset.

Allen Shiver Flowers Foods pull quote
 

The company is projecting depreciation and amortization of $145 million to $150 million; net interest expense of $11 million to $12 million; an effective tax rate of 26%, reflecting the effects of the new tax law; and capital expenditures for the year in a range of $95 million to $105 million.

Gross cost savings from the company’s Project Centennial initiative totaled $32 million in 2017, mostly due to a reduction in spending on purchased goods and services. Additional gross savings of $38 million to $48 million are anticipated in 2018.

“This target reflects further savings through P.G.&S., as well as from a more efficient and productive organizational structure, continuous improvement, supply chain optimization, and improved ordering and stale reduction initiatives,” the company said. During the fourth quarter of 2017, Flowers began transitioning to a new organizational model that provides greater focus on brand growth and operating efficiency. Flowers projects the transition to the new model will be completed in fiscal year 2019.

“The company also finalized its fiscal 2018 brand investment plans, which include new internal capabilities intended to deliver innovative products that offer consumers a meaningful point of difference,” Flowers said.

Mr. Shiver continued, “Our priority in 2018 is to create shareholder value by improving profit margins and driving sustainable sales growth, and we believe the progress we made in 2017 has us well-positioned for a promising 2018. We enter the year with strong momentum in our key initiatives. These efforts are expected to allow us to capture additional cost savings and drive brand growth in underdeveloped segments and geographies with new, innovative products and marketing investments.” 
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