THOMASVILLE, GA. — After generating record results in the first quarter 2022, Flowers Foods, Inc. anticipates headwinds in the second and third quarters and has lowered its earnings guidance for the year.
Flowers Foods net income in the quarter ended April 23 was $85.6 million, equal to 40¢ per share on the common stock, up 19% from $71.7 million, or 34¢ per share, in the first quarter of 2021. Sales were $1.44 billion, up 10% from $1.30 billion the year before. Adjusted earnings per share were up 7%, while adjusted EBIDTA rose 2.4%.
In prepared remarks May 19 in connection with an investment analyst conference call the following day, A. Ryals McMullian, president and chief executive officer, said pricing in the first quarter helped offset surging commodity costs and accounted for essentially all of the sales increase.
“These results could have been even stronger were it not for higher-than-expected inflation, supply chain disruptions, and the deliberate rationalization of our product line during the quarter in accordance with our portfolio strategy,” he said. “We implemented a price increase in January, which was intended to address the inflation we saw coming into the year. Since then, commodity prices have risen meaningfully higher than our original expectations due to a variety of factors, not the least of which is the conflict in Ukraine.”
He said while Flowers uses virtually no raw materials originating in Ukraine, the conflict there has had an impact on the global market for wheat and other commodities.
Supply chain disruptions resulted in production cuts during the quarter, Mr. McMullian said. The impact was felt most acutely in packaging, and especially bread bags and appears to be persisting in the current quarter.
“Our procurement team is working diligently to mitigate these shortages, and we expect the impact to be resolved in the third quarter,” he said.
During the May 20 call, Mr. McMullian intimated Flowers had become too reliant on a single supplier or limited number of suppliers for bread bags.
“There is plenty of capacity in the system that we’ve identified and are moving to,” he said. “So we’ll actually be spreading our risk around even more than it was before. So we’ll actually come out of this in a much better situation than we went into it.”
Product line rationalization also cost the company business in the quarter but will pay dividends longer term, Mr. McMullian said. In addition to reducing complexity, stock-keeping unit rationalization opens “up capacity to produce more of our higher-margin branded products, which should increase sales and margins over the long-term,” he said.
Despite the sales headwinds, the company grew market share to a new quarterly record with the company’s fresh packaged bread sales gaining 30 basis points of share, Mr. McMullian said. Nature’s Own, Dave’s Killer Bread and Canyon Bakehouse added 20, 20 and 10 basis points of share, respectively.
Later, he said the three brands enjoyed dollar sales gains in the quarter of 11%, 15% and 21%, respectively, and volume gains of 1.7%, 5.3% and 13.1%.
With sales of Dave’s Killer Bread still growing rapidly, Flowers has added new capacity, with the addition of a production line at the company’s Henderson, Nev., plant.
Adjusting its 2022 guidance, Flowers said its sales will range between $4.76 billion and $4.85 billion, versus previous guidance of $4.66 billion and $4.695 billion. Sales would be up 10% to 12% from 2021, if the new guidance is realized. Adjusted earnings per share are supposed to fall in a range of $1.20 to $1.30, down 5¢ on both sides of the range from $1.25 to $1.35 and compared to adjusted 2021 earnings per share of $1.24.
R. Steve Kinsey, chief financial officer and chief accounting officer, said first-quarter results fell in line with the company’s internal plan. While a new round of pricing is planned for June (the first one was implemented in January), he said Flowers will experience a lag between the onset of higher costs and the second price increase.
Repeating that the supply chain problems will be resolved in the third quarter, Mr. Kinsey said, “We expect the entirety of any additional financial impact from these headwinds to be limited to the second and third quarters. The benefits from our growth and efficiency initiatives are expected to contribute primarily to the second half of the year.”
He said initial 2022 guidance was based on assumption of high-single-digit cost increases and that 70% of the company’s key raw materials were covered at the time.
“Our commodity coverage is now approximately 95%, and we expect cost increases of high-single-digits to low-double-digits,” he said. “So far, we’ve been successful in obtaining the higher prices necessary to offset inflation. We remain optimistic that, combined with our internal actions, we should continue to be able to mitigate inflationary costs, though with some lag effect.”
To the issue of keeping up with unpredictably rising costs, Mr. McMullian added, “We stand ready to take more actions to protect our margin dollars should inflationary pressure increase further.”
Asked about comments in recent days by retailers suggesting they may push back on price increases going forward because of pressures inflation was placing on consumers, Mr. McMullian said Flowers does not expect problems with its increase set for June.“So as far as the pricing acceptance goes, we have not had any issues there,” he said. “Most of our pricing is in and planned — that was planned for June 6. So there’s really no issue there from our standpoint. So we’re confident we can get it all in.”