Difficult environment evident in Flowers results

by Josh Sosland
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THOMASVILLE, GA. — After reporting financial results that, while reflecting moderate earnings growth, failed to meet the company’s targets, Flowers Foods, Inc. on Feb. 8 revised downward its earnings guidance for fiscal 2011.

Net income at Flowers for the year ended Jan. 1 was $137,047,000, equal to $1.49 per share on the common stock, up 5% from $130,297,000, or $1.41 per share, in 2009. Net sales were $2,573,769,000, down 1% from $2,600,849,000 in 2009.

“Flowers Foods delivered solid earnings growth for the quarter and the year, and we again achieved record earnings per share for the year,” said George E. Deese, chairman and chief executive officer. “Even so, we did not meet our plan for sales and earnings. Our sales volume was lower than expected in the fourth quarter as we initiated pricing action and reduced promotion in the face of commodity headwinds. The weak economy and high unemployment continued to pressure the market and impact consumer buying patterns.”

Expanding on 2010 results, Flowers said the 1% sales decrease included a 1.7% decrease due to negative pricing/mix and 0.5% related to the deconsolidation of the variable interest entity (v.i.e. — related to how it accounts for business it does with a transportation carrier) partly offset by a 1% contribution from acquisitons and increased volume of 0.2%.

“The increase in volume was primarily driven by soft variety bread and sandwich rounds in the branded retail channel and the cake category in the store-brand channel,” the company said. “These increases were partially offset by decreased sales in branded white bread and the vending and fast-food category of the food service channel. Throughout the year, the company experienced significant pricing pressure and substantial promotional activity within the baking industry.”

Gross margins for the year rose to 47.7% from 46.5% because of lower ingredient costs as a percentage of sales, but the company said margin gains were kept in check by higher workforce-related and packaging costs as well as start-up costs for new production capacity.

Net income in the fourth quarter of 2010 was $31,438,000, equal to 34c per share, up 2.9% from $30,649,000, or 33c per share. Sales were $573,133,000, down 0.6% from $576,824,000.

The factors accounting for the sales decline in the fourth quarter were quite different from the year overall. Contributors were a 2.2% volume decline and 0.7% related to the v.i.e. Pricing mix provided 2% of benefit and acquisitions contributed 0.3%.

“The volume declines were primarily related to declines in the branded retail channel, particularly in the white branded, breakfast bread and cake categories, which were partially offset by increases in the sandwich round category,” Flowers said. “These volume declines were partially offset by increases in the store-brand retail channel, primarily in the snack cake category. Although the company initiated significant pricing actions during the quarter, the fresh baked foods category remained very competitive.”

Updating guidance for 2011, Mr. Deese said the company expects sales growth of 3% to 6% and earnings per share growth of 5% to 10%. The earnings guidance was lowered from previous guidance of 8% to 13%.

In addition to the financial results, Flowers said it had filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. The filing will allow the company to sell securities, including stock, preferred stock or debt.

“As of the date of this release, the company has no specific plan to offer the securities covered by the registration statement, and the company is not required to offer the securities in the future,” Flowers said.

The company said proceeds from any sale would be used for general corporate purchases and itemized a range of possible uses from share repurchases to possible acquisitions.

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