Strong sales of Dave’s Killer Bread and increased efficiencies from Project Centennial, including benefits from a voluntary separation incentive plan, helped boost first-quarter profitability at Flowers Foods, Inc. While adjusted earnings were solidly higher, the results failed to meet Wall Street expectations.
Flowers Foods net income in the first quarter ended April 21 was $51,247,000, equal to 24c per share on the common stock, down 15% from $60,418,000, or 29c per share, in the first quarter last year. Sales were $1,206,453,000, up 1.6% from $1,187,649,000.
Results in 2017 included a $28,875,000 gain from a divestiture. In the current year, special items included charges of $2,322,000 in multi-employer pension plan withdrawal costs, $2,483,000 in impairment of assets and $1,259,000 in restructuring charges.
Adjusted net income was $63.2 million, up 20% from the first quarter last year.
In trading May 17 on the New York Stock Exchange, shares of Flowers were down as much as 10%, slumping in the morning to $19.43 per share. While Flowers reaffirmed its guidance for fiscal 2018 financial results, investors apparently were skeptical. The company’s forecasts for the year were for sales ranging from $3,921 million to $3,982 million, and earnings per share of $1.04 to $1.16. Flowers has had trouble hitting its guidance at times in recent years.
“We are pleased with the solid start to the year,” said Allen L. Shiver, president and chief executive officer of Flowers Foods. “We achieved record sales in the first quarter, and made important progress on our strategic priorities, giving us confidence in our ability to meet the objectives we’ve set for the year. Sales growth for the quarter was ahead of expectations, driven by the continued strength of Dave’s Killer Bread and the solid performance of our Nature’s Own and Wonder brands. In April, we introduced new, artisan-style products under Nature’s Own, and initial consumer response has been encouraging.”
In a May 17 conference call with securities analysts, Mr. Shiver said Flowers’ bread line outperformed the overall market even after the company raised prices in the first quarter in response to cost inflation.
He said the company introduced Boomin’ Berry bagels during April, extending its breakfast line.
“Since launching the D.K.B. breakfast line, we’ve doubled our market share in the $2 billion breakfast segment,” he said.
Asked by an analyst whether sales of D.K.B. have risen by 2 to 2.5 times since the acquisition three years ago, Mr. Shiver said the numbers were not out of line.
In addition to an artisan-style bread named Nature’s Own Perfectly Crafted, Flowers also recently introduced Non-GMO Project verified Nature’s Own in certain market. The company moved to standard sizes and formulas for Wonder bread and buns and updated packaging, all to “strengthen the consistency, quality and store presence.”
Also during the quarter, Flowers launched its Camo for the Cause marketing promotion in support of the United Service Organization (U.S.O.).
Efforts to enhance efficiency included the creation of business unit field marketing teams “dedicated to capturing consumer insights in markets nationwide and sharing feedback on brand performance and campaigns,” Flowers said. Working more closely with independent distributors, order quality was improved and stale product returns reduced. Supply chain optimization initiatives were launched.
The steps are expected to generate gross savings of $38 million to $48 million in 2018.
“A portion of these savings are being invested into incremental marketing and innovation programs to drive brand growth,” said R. Steve Kinsey, chief financial officer and chief administrative officer. “These incremental costs will primarily impact margins in the second and third quarters.”
Drilling deeper into the first quarter sales figures, Flowers said branded retail sales rose 2.4% while store brand sales were up 0.2%. Non-retail and other sales were up 0.6%.
“Branded retail sales increased due to continued sales growth from branded organic products and in our expansion markets, as well as from a more favorable price/mix, partially offset by declines in branded buns and rolls and branded cake,” the company said. “Sales of D.K.B. products continued to increase, driven by continued volume gains and the introduction of breakfast items during the second quarter of fiscal 2017.”
Over the last few years, Flowers executives frequently have emphasized the importance of protecting market share in discussing the snack cake market. In the May 17 call, Mr. Shiver’s focus principally was on making the business more profitable.
“This team is streamlining the assortment, rationalizing price points, prioritizing innovation, rightsizing capacity and identifying investments to drive manufacturing efficiency,” he said.
Earnings before interest and taxes for the Direct-Store-Delivery segment were $84,425,000, down 3.3% from $87,261,000. Sales were $1,015,484,000, up 1.6% from $999,860,000.
D.S.D. volume during the quarter was down 1.8%, but pricing/mix added 3.4 percentage points to the quarterly sales totals.
The profit drop was attributed by Flowers to special charges plus the effects of “outside purchases and higher ingredient and workforce-related costs.”
Outside purchase referred principally to the D.K.B. breakfast line, Mr. Shiver said.
“Partially offsetting these items were higher sales on improved pricing and reduced stales, the benefit of the voluntary separation incentive plan and other restructuring initiatives, and decreased depreciation and amortization expense,” Flowers said.
Warehouse Delivery EBIT was $14,562,000, down 7% from $44,695,000. Sales were $190,969,000, up 1.7% from $187,789,000.
The change in profitability reflected the $28.9 million divestiture gain last year and “a shift in mix from higher margin branded bread items to lower margin cake and food service items, partially offset by lower workforce related costs,” Flowers said.