After a strong second quarter, sales at Flowers Foods, Inc. are not meeting expectations so far in the third quarter, said R. Steven Kinsey, chief financial officer and chief administrative officer. In a Sept. 5 presentation, Mr. Kinsey said workforce turnover and rising transportation costs are likely to remain challenges for the company the balance of the year.
Mr. Kinsey and Allen L. Shiver spoke to investment analysts at the Barclays Global Consumer Staples Conference. Mr. Kinsey offered a brief update on quarter-to-date results and the outlook for the rest of the year.
“On the top line, our year-over-year comparisons may be impacted by weather events last year,” he said. “Also, we continue to monitor the lingering effects on our business caused by the quality issues we experienced due to inferior yeast received in the second quarter. As discussed, when we reported our second-quarter results, elevated turnover in our workforce has continued to pressure our manufacturing efficiencies and margins. In addition, freight costs remain a significant headwind. These pressures are likely to continue through the rest of the year. Overall, the third quarter has started slightly softer than we had anticipated.”
He predicted “business wins” and savings initiatives would provide a partial offset to the various headwinds.
Mr. Kinsey described Flower’s capital position as strong, noting that the company has repaid $179 million in debt since the end of 2015, has little in the way of pending debt maturities, has plenty of cash and a debt-to-EBITDA ratio of 1.8 times.
Mr. Shiver spoke about Flowers’ merger and acquisition ambitions at different points during the presentation, highlighting the company’s continued interest in “adjacencies,” whether in entirely new markets or new product segments such as breakfast bread.
“We can achieve this organically through our high potential brands or through strategic acquisitions,” he said. “Since we are already very strong in the traditional loaf and bun and roll segments of the category, we are focusing on product segments where we’re underdeveloped. For example, breakfast items and dinner rolls represent more than $3 billion at retail, yet our share of those segments are in the single digits.
“Bolt-on acquisitions are still an important part of our growth plan. Independent regional bakers collectively, have a 24 share of the market, and offer opportunities for us to build scale and capabilities geographically. We also see growth opportunities in specialty food service, the in-store bakery and baked snacks.”
While the retail landscape is in the midst of considerable change, Flowers achieved a record high 15.9% market share in the second quarter, Mr. Shiver said.
“(Consumers) are shopping across multiple channels,” he said. “Traditional grocery stores are becoming more specialized in either premium or value offerings. And we’re now seeing the merger of e-commerce with brick-and-mortar retail, further changing the food category dynamics. We believe Flowers is well positioned to take advantage of this changing consumer environment. Two of our top bread brands, Nature’s Own and D.K.B. (Dave’s Killer Bread), have incredible versatility. Nature’s Own has a legacy of better-for-you innovation, while D.K.B. has successfully expanded into the breakfast segment.”
Responding to an analyst’s question, Mr. Shiver offered a full-throated endorsement of the value of direct-store delivery of fresh baked foods, but acknowledged D.S.D. may not be ideal for certain categories the company is eyeing.
“If you're a retailer, you want to make sure that your fresh bakery department is remained stocked and in very good condition,” he said. “D.S.D. is exactly the right form of distribution to take care of the product movement that we are experiencing and have always experienced in this fresh bakery category. In the cake segment, there’s so much importance on offline displays. And there again, there’s no better way to generate offline displays with a retailer than having our independent distributor in their store, merchandising their displays, making sure that they’re back in there on Saturday afternoons and Sunday afternoons to keep the products in stock. So in the case of fresh bakery, bread, buns and rolls and also cake, we’re very, very confident in our D.S.D. model.
“As we look at other segments of the store, primarily in the perimeter, we have interest there, but they may not lean in the direction of D.S.D. We have to be very careful that we don’t overload our independent distributors with too many items. They need to be handling the items that are generating very attractive turns. But as we look at growth of the company, it does not have to be D.S.D.”
Discussing Project Centennial, Mr. Shiver said Flowers is “partway through our transformation.” Having completed its organizational restructuring, the company is aggressively targeting its indirect spend, he said.