Nature's Own bread and Wonder bread, Flowers Foods
Nature’s Own and Wonder bread drove share gains in the white and the soft variety loaf segments for Flowers.

THOMASVILLE, GA. — The market share of Flowers Foods, Inc. in the commercial packaged bread category climbed to 15.8% in the third quarter ended Oct. 7. It was the third consecutive quarter of bread market share gain, said Allen L. Shiver, president and chief executive officer of Flowers.

Mr. Shiver discussed the Flowers third-quarter results in a Nov. 7 conference call with investment analysts.

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

“Nature’s Own and Wonder drove share gains in the white and the soft variety loaf segments while Dave’s Killer Bread gained share in the specialty premium and breakfast segments,” Mr. Shiver said. “Continued growth in expansion markets also supported our share gains. The cake category increased 1.2% in dollars. I.R.I. (Information Resources Inc.) data show our sales declining in the quarter, but the fact is, our overall cake sales grew due to solid gains in the untracked vending channel.”

Flowers Foods, Inc. sustained a loss of $33,571,000 in the third quarter ended Oct. 7. A year earlier, Flowers had third-quarter net income of $40,216,000, equal to 19c per share on the common stock. Sales in the third quarter were $932,822,000, up 1.5% from $918,791,000.

Major charges were taken during the quarter, the largest of which was $100,549,000 in restructuring and related impairment charges. Other charges in the quarter were $18,268,000 in multi-employer pension plans withdrawal costs and a $3,030,000 pension plan settlement loss.

Dave's Killer Bread bagels, Flowers Foods
New products, including Dave’s Killer Bread bagels, helped drive sales growth at Flowers in the third quarter.

Adjusted EBITDA in the third quarter was $112.4 million, up 9% from the same period a year earlier. Adjusted EBITDA margins widened by 80 basis points during the quarter, to 12% of sales.

Adjusted sales (excluding sales related to a divestiture) were up 2.1%. Flowers attributed about 40% (80 basis points) of the 2.1% sales gain to a surge in business associated with pantry stocking related to two hurricanes during the quarter.

Consolidated adjusted operating margin during the third quarter was 8.5% of revenue compared to 7.7% in the third quarter last year. The 80-basis-point increase was attributed by the company to improvements in the direct-store delivery segment.

In contrast to more upbeat remarks by another ranking baker regarding sales trends in the bread category, Flowers has seen little evidence of improvement, Mr. Shiver said. He cited data indicating the fresh packaged bread category experienced a dollar sales increase of 50 basis points during the quarter and a unit-volume decrease of 80 basis points.

The overall competitive environment is consistent with recent quarters,” he said. “Consumer demand remained soft in certain segments, notably, private label and non-organic loaf bread. The promotional environment varies market to market. That said, we believe our growth potential in underdeveloped product segments and geographies provides a counterbalance to broader category softness. Dave’s Killer Bread is driving our top-line growth while more than offsetting soft demand in other segments of the category. As you know, D.K.B. is the No. 1 organic bread brand and is benefiting from the growing consumer demand for fresh organic foods.”

Consumer response has been very positive to the second-quarter introduction of bagels and cinnamon bread under the Dave’s Killer Bread brand, Mr. Shiver said.

“We’re pleased with the share gains we’ve made in the breakfast segment since the launch,” he said. “As D.K.B. becomes more well known nationally, there is a tremendous upside. On the West coast where D.K.B. has been in the market the longest, sales velocity is almost double the markets where the brand has recently been introduced. We lapped the roll-out of D.K.B. across our direct store distribution network last quarter. In the years since that roll-out, distribution continues to expand into new stores and average unit volumes per store for D.K.B. continue to increase.”

Even on the West coast, though, Dave’s Killer Bread continues to enjoy growth, Mr. Shiver said.

A stock-keeping unit rationalization effort undertaken as part of Project Centennial has diminished by 30% the number of branded s.k.u.s offered by Flowers in the bread category. Mr. Shiver said the effort has reduced complexity but also has been a drag on sales, as expected.

“But we expect the bottom line to benefit due to better manufacturing efficiencies and improved execution in the marketplace,” he said.

R. Steve Kinsey, Flowers Foods
R. Steve Kinsey, executive vice-president and chief administrative officer of Flowers Foods

Adding additional detail to the Flowers financial results, R. Steve Kinsey, executive vice-president and chief administrative officer, said Flowers expects to pay 25% of the costs in 2017 for the voluntary separation agreement program completed during the quarter with the remainder to be paid in 2018.

He said in contrast to the continued success of D.K.B., organic bread sales under the Alpine brand “continued to be a headwind during the quarter.”

Full-year guidance for 2018 will be provided by Flowers management in February, Mr. Kinsey said.