Flowers Foods bread brands - Nature's Own, Dave's Killer Bread, Wonder Bread
Flowers Foods' share gains were driven by Nature’s Own, Dave’s Killer Bread and Wonder brands.

THOMASVILLE, GA. — While Flowers Foods, Inc. experienced numerous challenges in the bread market during the fourth quarter, Dave’s Killer Bread was not the only bright spot for the company, said Allen L. Shiver, president and chief executive officer. He noted that the quarter was the sixth in a row in which the company gained on its bread competitors, citing Information Resources, Inc. data pegging the company’s market share at 15.1%, up 40 basis points.

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

“Share gains were driven primarily by Wonder and Nature’s Own in the white loafs segment, and Dave’s Killer Bread in the specialty premium and breakfast segments,” he said in a Feb. 8 conference call with investment analysts. “These gains were partially offset by share losses due to heightened competitive activity and cycling of promotions in the soft variety and sandwich bun and roll segments.”

Further share gains are possible going forward, he said. For example, he noted that just over a quarter of retail fresh bread sales fall into the dinner roll and breakfast categories, segments in which Flowers has a low, single-digit share at present. Mr. Shiver said new products helped the company gain share in both segments during the fourth quarter.

As previously reported, 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.

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.

Consistent with the company’s strategic plan, profitable growth in 2018 will be pursued through a “revitalized brand plan” for Flowers’ core bread brands, Mr. Shiver said.

“This will be done through improved execution and innovation,” he said. “You will see Flowers introducing new products with clear points of difference and consumer appeal.”

Since the return of Hostess Brands, Inc. to the marketplace in 2013, Flowers has struggled to sustain its snack cake market share, much less grow the business. Mr. Shiver suggested the company has now taken major action to shore up this business.

Flowers Foods snack cakes pull quote

“With the snacking category continuing to evolve, we have placed responsibility for our two cake brands under a new leadership team,” he said. “This team is focused on improving the results of our cake brands by lowering cost and developing products in sync with consumer trends.”

Mr. Shiver described progress toward the objectives of Project Centennial as the company’s “most significant achievement” in 2017, and shifts in Flowers’ organizational structure extend well beyond snack cake leadership.

“We’ve assembled new teams that are charged with maximizing the value of our brands,” he said. “Many of these team members are new to Flowers and bring significant branded C.P.G. (consumer packaged goods) background and experience. Our new brand and marketing teams are developing a multi-year innovation pipeline, grounded in a deep understanding of emerging consumer trends.”

Even with these changes, the company said its organizational restructuring will continue into 2019, and Mr. Shiver said additional important elements of the company’s transition are underway.

“In particular, we’re upgrading our already strong analytics and I.T. capabilities to better support the new structure,” he said. “Once complete, we will be able to better measure performance and take additional steps to drive efficiencies across the company.”

While a complete picture of Flowers’ new organizational structure has not yet been shared, other glimpses of changes at the company were referenced during the call.

R. Steve Kinsey, Flowers Foods
Steve Kinsey, c.f.o. and chief administrative officer for Flowers Foods

“As far as the reorganization, our manufacturing team has been restructured to enable even greater collaboration between our bakeries,” said R. Steve Kinsey, chief financial officer and chief administrative officer. “This should increase run times and capacity utilization across the network.”

Announcing its earnings, Flowers said it 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. During the call, Mr. Kinsey said Flowers is expecting an effective tax rate of 25% to 26% during the year, down from 34% to 36% in prior years.

While Mr. Shiver didn’t detail the progress the company made toward Project Centennial, other tidbits came to light during questions and answers with analysts, one of whom asked about the status of Flowers’ stock-keeping unit rationalization.

Mr. Shiver said the process has been completed.

Mr. Kinsey added, “We basically didn’t lose any shelf space allocation with regard to the s.k.u. rationalization.”

Similarly, asked about strong Wonder bread sales trends (in the four weeks ended Dec. 17, sales were up 30%, according to I.R.I.), Mr. Shiver offered an indirect answer.

Debo Mukherjee, Flowers Foods
Debo Mukherjee was named c.m.o. of Flowers Foods in Sept. 2017.

“We’re really excited to have a new chief marketing officer, Debo Mukherjee, onboard,” he said. “And Debo is putting together a great team of existing team members as well as bringing on new talent. Everything is designed to focus on building our brands that have a true meaningful consumer point of difference.”

Asked about U.S. transportation challenges attributed to new trucking regulations, Mr. Shiver said Flowers was not facing severe problems. He did acknowledge costs were on the rise, but also noted the company operates with two- to three-year contracts with dedicated haulers who transport product from the company’s baking plants to its distribution centers. Looking ahead, he said the company benefits from what he described as “more of a closed-loop system.”

“So if you think of our bakeries, there’s a 250- to 300-mile radius from a delivery perspective,” he said. “It does allow drivers to make a daily run and then make it back home for the evening. So that does, we believe, provide an advantage by using this closed-loop system. So generally, our D.S.D. transportation costs — any increase there is fairly immaterial. And we do believe the way the model works does give us some advantage with the current transportation situation.”