THOMASVILLE, GA. — Recently announced legal settlements weighed on third-quarter earnings at Flowers Foods Inc., but underlying strength in the company’s operating business prompted management to raise its earnings and sales guidance for the balance of the fiscal year.

Flowers net income in the third quarter ended Oct. 9 was $38.9 million, equal to 18¢ per share on the common stock, down 12% from $44.3 million, or 21¢ per share, in the same period last year. Quarterly sales were $1.03 billion, up 3.9% from $990 million in the third quarter last year.

Results in the third quarter included $23 million in legal settlement costs and $9.2 million in business process improvement and consulting costs. Similar special items a year earlier resulted in a total of $11.2 million in costs. The third-quarter results also reflected $3.3 million in multi-employer pension plan withdrawal costs. The 2021 legal settlement costs included $16.5 million related to a six-year old lawsuit filed against Flowers in connection with the distribution of products baked at the Lepage Bakeries plants acquired by the company in 2012. The charges were included in the selling, distribution, and administrative expenses line item of the quarterly income statement.

Adjusted net income in the quarter rose 3.9% to $54.9 million, boosted by higher sales and lower interest expense. Higher marketing spending and transportation costs were a partial offset. Adjusted EBITDA in the quarter was $118.5 million, up 1.8% from a year earlier. The company’s adjusted EBITDA margins were 11.5%, down from 11.8% a year earlier.

In its updated guidance, Flowers said its sales for 2021 would total $4.3 billion to $4.34 billion, down 1% from 2% versus 2020 but up from previous guidance of $4.26 billion to $4.3 billion. The company’s earnings per share for the year are expected to fall between $1.22 and $1.26, up from earlier guidance of $1.17 to $1.22. Included in the guidance is 1¢ per share in “appreciation bonuses” to be paid to the company’s frontline workers.

Commenting on the guidance during a pre-recorded presentation Nov. 12 for securities analysts, R. Steve Kinsey, chief financial officer and chief administrative officer, noted that the updates leave Flowers’ full-year guidance above long-term targets for 1% to 2% sales growth and 7% to 9% for earnings per share growth, relative to the company’s 2019 basis. He said this will be achieved “even with a 5¢ headwind from our digital/ERP initiatives and no benefit from M&A.”

In trading Nov. 12 on the New York Stock Exchange, investors were impressed with the company’s results. Shares at mid-day were at $26.62, having hit a new 52-week high of $26.73, up 4% from the Nov. 11 close.

Breaking down the 3.9% gain in sales, Flowers said pricing and mix boosted sales 6.4%, partly offset by a 2.5% volume drop. Branded sales were $689.1 million, up $31.6 million, or 4.8%, from the same period a year earlier. Store branded sales, by contrast, fell to $124.6 million, down $11.5 million, or 9%. Non-retail and other sales were $214.2 million, up $18.1 million, or 9%.

“Branded retail sales increased primarily due to favorable price/mix and improved promotional efficiency, partially offset by volume declines from moderating at-home food consumption,” Flowers said. “Store branded retail sales decreased primarily due to volume declines as consumer purchasing shifted to branded retail products, partially offset by increased sales of store branded cake and gluten-free items.” 

The gain in non-retail and other sales reflected recovering demand from restaurants and schools and higher prices, said A. Ryals McMullian, president and chief executive officer. In pre-recorded comments for investment analysts Nov. 12, he highlighted the strength of Flowers bread brands.

“We’ve been very pleased to see how well demand for our branded retail products has held up,” he said. “In fact, sales of our top brands have continued to grow, even surpassing last year’s record third-quarter numbers.”

He said the company’s market share hit 18% in the third quarter, up 50 basis points from the third quarter last year and another 50 points from the same quarter in 2019.

“Our top brands are leading the way, with Dave’s Killer Bread gaining 50 basis points of market share, the most of any bread brand in the category, and Nature’s Own and Canyon Bakehouse up 20 and 10 basis points, respectively,” he said. 

More broadly, Mr. McMullian noted the move away from private label on an industrywide basis has continued for more than four years. Since 2017, branded fresh bread has gains 480 basis points of market share and now stands at 80.6%. Flowers’ share has expanded 210 basis points during this period, more than any competitor, he said.

New products have been key to Flowers’ recent market share gains, Mr. McMullian said, highlighting growth achieved by Dave’s Killer Bread in the breakfast and buns categories. DKB Powerseed Thin-Sliced bread has been rolled out nationally. He said Canyon Bakehouse has been gaining share, now up to 32% of the gluten-free category, boosted in part by new product introductions. He said the Perfectly Crafted sub-brand of Nature’s Own has performed well, reaching $150 million in retail sales.

During the call, Flowers presented data showing DKB sales have quadrupled since 2016 to $638 million from $154 million. Over the same period, non-Flowers sales of organic baked foods have climbed far more modestly to $265 million from $211 million. The company’s market share in organics has climbed to 71% from 42%. Over the same period, the company’s share of gluten-free bread sales has grown to 32% from 5%. Sales have climbed to $104 million from $12 million.

Asked by an analyst about the dominating market performance of DKB, Mr. McMullian highlighted geographic areas are generating especially strong growth.

“There are other organics that are out there, but Dave’s has a commanding (70) share for a reason — because it’s the best tasting, the best quality, best consistency,” he said. “We’re continuing to grow in the Northeast, which is a big part of the puzzle there. Bringing on Lynchburg (Va.) last year to support that growth has been a huge thing for us in Dave’s evolution. We continue to come out with new products with Dave’s. We’re testing some new products right now with them. There’ll be more coming next year. So increasing awareness is a big one. I’ve talked about this before.

“When you look at the great success of Dave’s that we're all very proud of, of course, but then you compare its household penetration to that of Nature’s Own, it's roughly half that of Nature’s Own. So even with the great growth we’ve experienced, we feel like that brand still has a ton of runway ahead of it, both with Dave’s current categories and in other categories, just because I think the brand is strong enough now to begin playing across different categories, which we’re obviously very excited about.”

In a brief update of the company’s digital initiatives, Mr. McMullian said the company is progressing from design to build phases. He said key areas of the initiative, including e-commerce, autonomous planning and the Flowers “bakery of the future” are progressing to the implementation phase.

Mr. Kinsey offered an update on three different legs of inflation Flowers and the rest of the industry face – input costs, transportation and labor. He said the company has been able to offset higher commodity costs so far with higher prices.

“We remain optimistic that, combined with other internal actions, we should be able to use pricing to mitigate the impact of inflation into 2022 if necessary,” he” said.

On logistics and freight, Flowers faces higher costs as contract carrier rates have repriced, Mr. Kinsey said.

“Our closed loop system stabilizes costs over the short term, but pricing over longer periods will adjust to market levels,” he said. “On the bright side, the strong relationships we’ve developed with our carriers has allowed us to maintain adequate capacity despite driver shortages and other challenges.”

With regard to labor, Mr. Kinsey said the company certainly has experienced challenges recruiting and retaining workers, but he noted workforce-related costs were “relatively unchanged” as a percentage of quarterly sales versus the quarter before.

Turning to supply chain issues, Mr. Kinsey described sourcing ingredients as a challenge but said the company has not yet faced significant supply chain disruptions.

“So far, we’ve been able to get what we need, and with the hard work of our procurement team,” he said.

In the first 40 weeks of fiscal 2021, Flowers Foods net income was $167 million, or 78¢ per share, up 73% from $96.5 million. Sales were $3.35 billion, down 0.5% from $3.37 billion in the same period the year before. Results in 2021 included the MEPP charge and a $16 million loss on the extinguishment of debt. The prior year period included a $109 million pension plan settlement and curtailment loss.