THOMASVILLE, GA. — Adjusted earnings at Flowers Foods, Inc. edged upward in the first quarter ended April 20, boosted by record sales, but commodity and labor cost headwinds pressured profit margins.
Flowers Foods’ net income in the first quarter was $65,866,000, equal to 31c per share on the common stock, up 29% from $51,247,000, or 24c, in the same period a year earlier. Net sales were $1,263,895,000, up 4.8% from $1,206,453,000 in the first quarter of 2018.
Adjusted for special items, earnings per share rose 7%, to 32c. Special charges in the 2018 quarter included $541,000 more in restructuring and related impairment charges than in 2019, $2,483,000 in impairment of assets charges and $2,322,000 in multi-employer pension plan withdrawal costs.
Excluding the contributions of Canyon Bakehouse, acquired in 2018, first-quarter sales were up 3% from 2018.
“We achieved record sales in the first quarter and are proud of the solid start to the year,” said Allen L. Shiver, president and chief executive officer. “In our core business, we benefited from pricing actions taken to mitigate inflationary headwinds as well as continued growth from key brands, including Dave’s Killer Bread, Nature’s Own and Wonder. The recently acquired Canyon Bakehouse also drove top-line growth, and we remain on-track with the roll-out of the brand across our distribution network.
“While we are pleased with the results of our growth initiatives and pricing actions to date, inflationary headwinds from commodities, labor and transportation continue to pressure margins. Therefore, in addition to improving price realizations, the team is focused on our supply chain optimization initiatives, which are intended to drive productivity and reduce fixed costs.”
With the earnings announcement and conference call with financial analysts, Mr. Shiver turned over the reins to his successor A. Ryals McMullian.
“As announced in February, after 41 years with the company, I will be retiring next week and Ryals McMullian will become Flowers’ next c.e.o.,” he said. “Flowers has never been better positioned for growth and continued success. It has been a privilege to lead this company and work alongside the best team in the industry. I am confident in Ryals and the entire Flowers team, and I know they will continue to execute on our strategic priorities and build shareholder value.”
In the May 16 call with investment analysts, Mr. Shiver described the company’s top-line results as especially encouraging. While base business volumes fell slightly, he noted that the fresh bread category overall saw volumes dip 3% in the quarter with dollar sales flat. Against that backdrop, he said the company’s market share hit a record 17% in the first quarter, up from 16.1% at the end of 2018.
“Approximately one-third of our share gains in the quarter came from newly added Canyon Bakehouse and Sun-Maid products,” he said. “The balance was driven by innovation and growth in our core national brands: Dave’s Killer Bread, Nature’s Own and Wonder.”
Commenting on the company’s innovation pipeline, Mr. Shiver cited a brioche-style variety of Nature's Own Perfectly Crafted, Wonder hamburger buns with a touch of honey and Tastykake Scoop Shop ice cream-inspired sweet snacks as evidence of progress in new product development.
Separate from new products, Mr. Shiver said the fastest growing segments in the bread market at present are organic and gluten-free specialty loaves.
“With D.K.B. and now Canyon Bakehouse, Flowers has top brands in both of these attractive segments,” Mr. Shiver said. “Furthermore, with Nature’s Own and Wonder, we have a strong and growing position in the traditional loaf segment, which is the category’s largest in both dollars and units.”
Moderating Mr. Shiver’s enthusiasm about results was margin pressure from commodities, labor and transportation costs.
“While pricing is an important tool to address these pressures, we’re also very focused on manufacturing efficiencies,” he said. “Recently, we clarified roles and adjusted incentive programs. This additional level of accountability is designed to drive execution and accelerate the impact of our cost-savings initiatives. Reducing fixed operating costs through our multi-year supply chain optimization initiative remains a top priority, and we are making good progress in several areas.”
As an example, Mr. Shiver said Flowers recently began baking D.K.B. bread at a plant in Lewiston, Maine. The move will lower transportation costs and may boost sales thanks to enhanced access to the Northeast market.
Asked whether additional price increases may be necessary in the weeks and months ahead to offset the cost inflation, Mr. Shiver’s response suggested such moves are not likely.
“A lot of pricing is already in place,” he said. “We’re really focused looking out the remainder of the year on cost-savings initiatives. And all those will all combine to help us to achieve the margin targets we’ve laid out.”
The importance of reducing D.K.B. costs were underscored in comments by R. Steve Kinsey, executive vice-president and chief financial and administrative officer. He was asked during the call why gross margins were not expanding faster, given the sales growth.
“The new products are really driving sales,” he said. “Their gross margin has been slightly lower as we’ve been ramping up those brands. You may recall D.K.B., we rolled out a couple of years ago, we are still continuing to see good improvement in overall margins from that brand. And as we ramp Canyon up and take it across the whole network, we should begin to see improvements from that perspective.”
During the quarter, Flowers ceased breaking its results down by operating segments and will issue results as a single operating segment going forward, he said.
“We believe this reporting structure is a better and more accurate reflection of our operations and our business following our organizational restructuring and other internal changes over the past several quarters,” Mr. Kinsey said. “The shift from a distribution focus to a brand-centric company and interrelated nature of our manufacturing and distribution capability leads us to one consolidated segment. “
Both Mr. Shiver and Mr. Kinsey said the company was confident that its guidance for 2019 (unchanged from earlier guidance for the year) was achievable, even without further price increases. Mr. Kinsey noted that the company will be lapping significant events in the middle of last year that should make the second and third quarters of 2019 appear more favorable. These 2018 episodes included heavy promotions associated with new product introductions and unexpected disruptions caused by faulty ingredients.
“Our forecast does anticipate more favorable comparisons in the second and third quarters of 2019 as a result of these events,” Mr. Kinsey said.
Noting the conference call will be his last as c.e.o., Mr. Shiver offered four takeaways for the quarter:
“First, our strong brands are driving growth,” he said. “They’re outperforming our category. Second, we’re taking actions to mitigate the impact of inflationary headwinds on our profitability. And third, Flowers is stronger than it has ever been. Ryals is the right choice to be the next c.e.o., and I’m confident he and the team will capitalize on opportunities to build value for shareholders.”
Investors were pleased by the results. In trading May 16 on the New York Stock Exchange, Flowers’ shares climbed as high as $22.50, up 6% from the May 15 close and a new 52-week high. It was the highest level for Flowers’ shares since April 2018.