THOMASVILLE, GA. — During the fourth quarter of 2015, Flowers Foods, Inc. gained share in the branded bread market. Still, the company’s bread sales total overall fell shy of its goal by a wide enough margin to lop more than 30% off projected fourth-quarter Flowers profits. News of the earnings shortfall triggered a severe sell-off in Flowers shares for the second time in three months.

As previously reported, Flowers fourth quarter net income was $32,246,000, or 15c per share, up 15% from $28,010,000, or 13c. Net sales were $858,363,000, down 2%. As recently as Nov. 12, 2015, well into the fourth quarter, Flowers projected profits of 22c to 24c per share and sales of $898 million to $922 million for the period.

In trading on the New York Stock Exchange Feb. 11 after the company’s financials were issued, Flowers shares dropped 20%. Following the downward revision in earnings guidance Nov. 12, Flowers shares dropped 12%. All told, Flowers shares on Feb. 11 were down 38% from the 52-week high of $27.31, slicing $2.2 billion off the company’s market capitalization.

In a conference call Feb. 11, Flowers executives blamed a softer-than-expected overall bread market for the miss from the company’s November guidance.

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

“During the fourth quarter, sales and volume growth in the fresh packaged breads category slowed further than we had expected,” said Allen L. Shiver, president and chief executive officer. “We were not alone. Based on channel data tracking the total store, it appears food retail as a whole hit a speed bump in the fourth quarter.”

“Our share did not decline,” Mr. Shiver said later in the call. “So any sales that we did not capitalize on did not to go to competition. We still maintained our growth trend within the category. The problem is that the category declined in the fourth quarter.”

On a quarter by quarter basis in 2015, packaged bread unit sales were flat in the first quarter, down 1.2% in the second and down 0.4% in the third. Unexpected was a 1.8% drop in the fourth quarter, Mr. Shiver said. The figures he cited were from the I.R.I. Flowers Custom Database.

“We did not have as strong of a holiday around Thanksgiving or Christmas as we had forecasted,” he said. “So those were two big factors in part of the falloff as well.”

The sales shortfall, in turn, resulted in sub-optimal efficiencies that adversely affected profit margins, said R. Steve Kinsey, executive vice-president and chief financial officer.

R. Steve Kinsey, Flowers Foods
R. Steve Kinsey, executive v.p. and c.f.o. of Flowers

“Looking back to November when we revised our guidance, we expected sales growth to be moderate, but not to the extent we experienced,” he said. “With sales being less than anticipated we were unable to leverage our cost structure, which resulted in earnings per share coming in below our guidance. Acquisitions performed relatively in line, and when looking across the business there was no one key factor that drove the top-line miss.”

In discussions during the call, acquisitions, specifically Alpine Valley Bread, did account for a meaningful part of the fourth-quarter sales shortfall.

“There was some business that was projected to come into fourth quarter with Alpine that did not come about, but the good thing is we’re actually beginning to see that the business came to fruition in the first quarter of 2016,” Mr. Kinsey said. “So that did impact the projections for the organic business in 2015.”

Mr. Shiver said $9 million to $10 million of the sales shortfall related to this business that failed to materialize.

In addition to the Alpine sales that have come through in early 2016, Mr. Shiver offered a number of reasons for optimism looking ahead.

“Our brands are performing well relative to the category, which helps us grow share across our geographic reach. In addition we are working to realize the growth potential from our recent acquisitions,” Mr. Shiver said.

Certain, but not all, macro trends are favorable, Mr. Shiver said.

“Looking ahead to 2016 obviously you see nice pull back in the wheat markets, and overall the general input basket there is a nice tailwind coming into 2016,” he said. “Saying that, there are some other costs that will be up. Workforce costs will be up. There will also be some continued costs related to the integration of the two recent acquisitions. As well as some costs related to continue growing in our expansion markets. So from that perspective it is not a wash, but we will see some offset of the tailwinds for 2016.”

Mixed signals appeared to come from the Flowers executives about marketplace pricing.

“Regarding pricing, trade promotion effectiveness and efficiency remains a top priority for us,” Mr. Shiver said. “We will make every effort to eliminate unproductive activity and maximize return on our promotional spending.”

Flowers Foods branded breads
During the fourth quarter of 2015, Flowers Foods, Inc. gained share in the branded bread market.

At the same time, he acknowledged the need to be aggressive in the marketplace both in core markets and new geographies.

“We did have some activity in our core markets we had to react to,” Mr. Shiver said. “But we also in expansion markets basically are growing our Nature’s Own brand and expansion markets by being very competitive with the market leader as we move forward.”

While optimistic about pricing, comments by the Flowers executives may suggest some vulnerability as well.

“Our average price in the soft variety categories is roughly 9% higher than the market,” Mr. Shiver said. “So, because we have the No. 1 brand, our competition is always aiming at that brand. But in terms of moving forward, I don’t anticipate any deterioration of pricing. I’m encouraged by the I.R.I. numbers in the fourth quarter showing overall pricing included — increasing. And as I mentioned earlier we are very focused, starting to see some of the results of that pricing in the last few weeks. So we’re optimistic about improving pricing in 2016, not deteriorating pricing.”

Yet another potential threat facing Flowers in 2016 is a series of class action lawsuits filed against the company over alleged misclassification of truck drivers as independent contractors.

While he did not directly comment on the specific cases, Mr. Shiver said the independent contractor model has a long and established history in baking.

“We recognize that there may be some questions in the marketplace on the independent distributor business model,” Mr. Shiver said. “It is important to remember that our competitors and others across a broad range of industries use very similar models. Flowers has utilized the independent distributor program for over 30 years. During that time thousands of these entrepreneurs have grown their business and built wealth.”

Tim Ramey, Pivotal Research Group
Tim Ramey of Pivotal Research Group

During questions and answers, Tim Ramey of Pivotal Research Group, suggested the legal cases will not be settled this year and that Flowers may make changes that will result in drivers making fewer unprofitable deliveries to dollar stores and certain quick-service restaurants. Mr. Ramey, who recently issued an inflammatory report on the lawsuits, said these changes could crimp 2016 sales.

Without going into specifics, Mr. Shiver said Mr. Ramey’s question was based on faulty premises.

“Tim, some of the comments you just made we do not agree with,” Mr. Shiver said. “Our independent distributors are independent business people. They run their business. They are in charge of their operations. And the items that you just mentioned are not accurate. We are — continue to be very confident in our independent distributor model. The lawsuits that are in place we believe do not have merit, and our intention is to vigorously defend our position.”

Mr. Ramey has said the lawsuits “pose dramatic, perhaps existential risk” to Flowers.