THOMASVILLE, GA. — Cost increases and sales mix pressured gross margin at Flowers Foods, Inc. in the second quarter, contributing to a decline in earnings during the period. Net income in the second quarter ended July 16 was $28,210,000, equal to 21c per share on the common stock, down 16% from $33,756,000, or 24c per share, in the same period a year ago. Excluding one-time costs of $3.2 million related to the acquisition of Tasty Baking, e.p.s. in the most recent quarter was 23c.

Sales in the quarter were $642,596,000, up 6% from $607,716,000 in the same period a year ago. The increase was attributable to favorable pricing/mix of 4.5 percentage points and contribution from the Tasty Baking acquisition of 3.3 points, partially offset by decreased volume of 2.1 points.

“In the second quarter, we delivered solid top-line results and continued to focus on strategies to position Flowers Foods favorably over the long term,” said George E. Deese, chairman of the board and chief executive officer. “Sales growth was driven by a combination of good performance in our branded retail business and the contribution from the Tasty acquisition. From an earnings perspective, the D.S.D. segment performed well, although cost increases and sales mix pressured gross margin. In the warehouse segment, margins were impacted as pricing lagged significantly higher ingredient costs and by an unforeseen shift of certain planned volume to later in the year. Both of these issues are being addressed and we expect improvement in the remaining quarters of 2011.

“A prolonged and slow economic recovery, compounded by higher costs, has continued to pressure consumer buying as well as business operations. While these macroeconomic factors can create short-term fluctuations in results, our team is managing through those issues by improving operations, reducing costs, and achieving the pricing necessary to keep our margins within our target range. Despite these pressures, we have confidence that our operating strategies are sound and our growth targets attainable over the long term.”

Mr. Deese said integration of Tasty Baking “is well under way,” and the company has begun to roll out Tastykakes in D.S.D. markets.

“In mid-July, delivery of Tastykakes through the company’s distribution system started in most of Florida, Georgia, Alabama, and South Carolina,” he said. “Tasty Baking fits nicely into the five-year growth plan we shared at our analyst event in March, because it brings growth opportunities in new markets in the mid-Atlantic and Northeast for our Nature’s Own brand as well as new markets for the Tastykake brand in the South and Southwest. We continue to believe market expansions, acquisitions, and further industry consolidation offer significant growth opportunities for Flowers Foods.”

Gross margin as a per cent of sales for the second quarter was 46.8%, which compared with 47.6% in last year's second quarter. The decrease was due primarily to an increase in ingredient and packaging costs as a per cent of sales, partially offset by decreases in workforce-related costs as a per cent of sales, Flowers said.

Meanwhile, the increase in ingredient costs was primarily attributable to flour, sweeteners, shortening and cocoa.
Selling, distribution and administrative costs as a per cent of sales for the quarter were 36.8% compared with 35.9% in the same quarter last year. Flowers attributed the increase of 90 basis points as a per cent of sales to one-time pre-tax costs of $4.5 million associated with the Tasty acquisition.

Operating margin as a per cent of sales for the quarter was 6.7%, which compared with 8.4% in last year’s second quarter. EBITDA as a per cent of sales for the second quarter was 10%, which compared with 11.7% for the same quarter last year.

For the first six months of fiscal 2011 net income was $69,371,000, or 51c per share, down 7% from $74,443,000, or 54c per share, in the same period a year ago. Sales rose 3% to $1,444,421,000 from $1,402,742,000.

Looking ahead to the remainder of fiscal 2011, Mr. Deese said the company expects sales growth of 7% to 11%, including the Tasty acquisition. Capital expenditures are expected to be $85 million to $90 million.