An agreement to acquire a gluten-free baker, organizational changes and the start-up of a new high-speed bun line were among steps taken during the third quarter to enhance the financial performance of Flowers Foods, Inc. The moves come against a difficult financial backdrop with quarterly sales lighter than expected and a decision by the company to further cut earnings guidance for 2018.
Net income of Flowers Foods in the third quarter ended Oct. 6 was $39,630,000, equal to 19c per share on the common stock, versus a loss of $33,571,000 during the third quarter last year. Sales during the quarter were $923,449,000, down 1% from $932,822,000.
The same day the company announced its quarterly results it said it has reached an agreement to acquire Canyon Bakehouse L.L.C., a gluten-free baking company, for about $205 million.
Results in the third quarter included a $1,891,000 recovery in connection with inferior yeast products. For the year, the company has lost $1,993,000, attributable to inferior ingredients. In the third quarter of 2017, Flowers took restructuring and related impairment charges of $100,549,000. Such charges in the third quarter of 2018 totaled only $497,000. Also in the third quarter of 2017, Flowers had multi-employer pension plan withdrawal costs of $18,268,000, versus none in the same period of 2018.
Allen L. Shiver, president and chief executive officer, said Flowers hit record market share in the third quarter.
“We also made organizational changes designed to enhance performance and increase accountability,” he said. “We are continuing to take steps to optimize our supply chain, including the start-up of a high-speed production bun line in Oxford, Pa., and the closing of an inefficient bakery in Brattleboro, Vt. Extending our portfolio into adjacent product segments is a strategic priority, and today we announced the acquisition of Canyon Bakehouse, a leading producer of gluten-free bakery products. Gluten-free is a growing segment of the category and one where we believe we can leverage our powerful distribution network to grow enterprise grow enterprise value.”
In early September, Flowers said third-quarter sales were softer than expected, and in announcing results for the full quarter, the company cut its guidance for the full year. It was the second straight quarter in which Flowers lowered its forecasts. Earnings per share for the year are expected at 90c to 95c, down from $1 to $1.07 and as high as $1.16 in the spring. The sales forecast was left unchanged at $3,921 million to $3,982 million.
“Despite progress on our strategic priorities, we are not satisfied with our performance this quarter,” Mr. Shiver said. “We continue to face a challenging operating environment that impacted our third-quarter financial results and our full-year outlook. Sales in the quarter were down, compared to the prior year, due to expected losses of low-margin food service business, lower hurricane-related volumes and disruptions related to inferior yeast. We expect these headwinds to be transitory. Also impacting results in the quarter were inflationary cost pressures from commodities and transportation. We are working to address these higher costs through pricing actions and our ongoing savings initiations.”
Commenting during a Nov. 8 conference call on sales trends in the third quarter, Mr. Shiver said Dave’s Killer Bread enjoyed growth, and Flowers’ top bread brands gained market share — Nature’s Own, Wonder and D.K.B.
Perfectly Crafted, a new brand within the Nature’s Own family, has performed well, Mr. Shiver said. Other new products enjoying early success include D.K.B. organic bagels and breakfast bread.
“We are further extending our reach into breakfast with our recent licensing agreement to produce and market Sun-Maid Raisin Bread,” he said.
Mr. Shiver said it was the ninth consecutive quarter in which Flowers gained share in the bread market.
“However, we did see branded retail sales decline in the quarter,” he said. “This was driven by lower cake sales and difficult comparisons due to multiple hurricanes in the third quarter last year.”
Turning back to the Flowers cake business, Mr. Shiver appeared to acknowledge that extended efforts to stem the loss of market share have not been successful.
“We are going back to the basics and taking actions to right size this business,” he said. “This year, the focus has been on product assortment, pricing and quality. To be sure, we are offering items with clear consumer feel. With this work as the foundation, our plan is to build new innovation and packaging platforms starting next year.”
Asked about the potential for growth in the Canyon Bakehouse line, R. Steve Kinsey, chief financial officer and chief administrative officer, said Flowers expects to build this business much the way it did when D.K.B. was acquired.
“If you look at the opportunity compared to organics or Dave’s Killer Bread, I’d say it’s probably not the size of opportunity you see with organics, but we still believe there’s great growth opportunities within the gluten-free category,” he said. “And we believe that what you saw with D.K.B. and the strength of D.S.D. that we’ll be able to do that as well in the gluten-free category.”
Mr. Shiver said Flowers will be conservative in projecting 2019 consumption trends to ensure the company has an appropriate cost structure in place.