THOMASVILLE, GA. โ Preliminary signs that the shock of higher prices is wearing off and shoppers are โacclimatingโ and โreverting toward prior purchasing behaviorโ have begun to emerge, said A. Ryals McMullian, chairman, president and chief executive officer of Flowers Foods, Inc.
Mr. McMullian made the comments in connection with the announcement of sales and earnings growth in the companyโs second quarter of fiscal 2023. In response to the results, management raised financial guidance for the full year.
In the 12 weeks ended July 15, Flowers Foods net income was $63.77 million, equal to 30ยข per share on the common stock, up 19% from $53.68 million, or 25ยข per share, in the second quarter of 2022. Net sales were $1.23 billion, up 9% from $1.13 billion during the second quarter last year.
Adjusted net income in the second quarter was up 9%, and adjusted EBITDA rose 11%. EBITDA margins were 10.8%, a 20-basis point improvement from the second quarter last year.
Investors were impressed. In New York Stock Exchange trading early on Aug. 11 after results were announced, Flowers share price rose as high as $26.31, up 6%.
Earnings during the quarter were boosted by a 90-basis point drop, to 51% of sales, in materials, supplies, labor and other production costs.
Flowers said inflation-driven price increases have more than offset input cost inflation, lower production volumes, increased product returns and higher maintenance costs.
Sales volume in the second quarter was down 6.1%, but overall sales rose due to a 13.3% boost from pricing/mix and 1.6% from the Papa Pita acquisition.
Branded retails sales were up 7.1%, to $787.8 million with volume down 1.5%, pricing/mix up 7.1% and Papa Pita adding 1.5%.
More severe were swings in โother sales,โ which were up 11.9%, to $440.3 million. The jump reflected a price increase effected before the quarter. Volume was down 10.5%, pricing mix leapt 20.6% and Papa Pita added 1.8%.
In prepared comments issued Aug. 11 in connection with the earnings release, Mr. McMullian said he was pleased by the companyโs bounce back from a tough first quarter.
โFollowing an unexpectedly slow start to the year, which we detailed on our first-quarter call, we recovered nicely in the second quarter and delivered strong results despite a still somewhat uncertain macro environment,โ he said.
Noteworthy was an improvement in volume trends for branded retail bread relative to what had been experienced in recent quarters. Mr. McMullian said Flowersโ brands performed well despite a trade down to private label and price increases.
โWe successfully maintained our branded retail unit share in tracked channels for the fresh packaged bread category,โ he said. โOur performance was even stronger in the grocery channel, where we gained 20 basis points of unit share.โ
Particularly notable was the performance of the companyโs organic, specialty loaf, and breakfast categories, Mr. McMullian said, citing gains of 290, 160, and 60 basis points of unit share, respectively. In the case of specialty loaf and breakfast, Flowersโ share hit new highs.
He said the company was encouraged by the source of growth in sales of organic bread.
โWe found that sales metrics for Daveโs Killer Bread among middle- and lower-income consumers improved compared to the prior year, with increases in unit sales per buyer, product trips, and repeat rates,โ he said. โFurthermore, DKB grew overall units by 7% in tracked channels, which we believe is a decent barometer for consumer health given the brandโs premium positioning.โ
While hopeful based on the second-quarter results, Mr. McMullian said Flowers would closely monitor how buying trends are playing out โbefore concluding that consumer health is on a sustainable upward trajectory.โ
Asked by an analyst during questions and answers about trends in private label, Mr. McMullian responded by noting that private label continued to gain share during the second quarter but at a slower rate.
โWeโve talked about this all year, this private label phenomenon is playing out more in mass than it is in grocery, and actually it lost share in grocery,โ he said. โIt continues to gain in mass. Weโve talked about thereโs been a little bit of channel shift as consumers seek bargains in mass, club, dollar, that sort of thing. I do think also that itโs important to note that the private label share gains are generally confined to that loaf category, the traditional products. In other words, those with the least differentiation. Private label lost share in virtually every other category where you tend to see more differentiation, so especially breakfast sandwich buns and rolls, that sort of thing. The trend toward premiumization is definitely still there. Clearly, consumers are still looking for bargains, but that trend is headed in the right direction from our standpoint as we look to build our branded business.โ
Of the steep decline in Flowersโ Other category, Mr. McMullian said the result was โaligned with our portfolio strategyโ to shift business toward higher-margin, branded retail products. Still, he said the volume declines should moderate in the second half of the year.
Offering an update on Flowersโ strategic priorities, including developing the companyโs team, Mr. McMullian credited a restructuring of operational responsibilities at bakeries, focusing on supply chain more than sales, for freeing up the companyโs sales team for greater success.
โThe sales team delivered outstanding execution over the Memorial Day and Fourth of July holidays, resulting in a company record for bun unit share, a key part of our portfolio strategy,โ he said, predicting further benefits ahead from the restructuring.
The companyโs commitment to innovation, another strategic pillar, was manifest in the companyโs launches of Natureโs Own Keto Net One loaf, Natureโs Own Perfectly Crafted Everything buns and Wonder Hawaiian buns, Mr. McMullian said. With distribution now at 12,000 stores, the rollout of DKB snack bars continued.
โOur team is working hard to drive trial and repeat sales through a multifaceted marketing campaign,โ he said.
Flowers continues to advance its DKB bar pipeline. DKB Amped-Up Protein Bars are in test markets with a nationwide launch planned for 2024. DKB Crunchy Snack Bites are in test markets.
A weak spot for Flowers in the second quarter was its Canyon Bakehouse brand, which lost 230 basis points of gluten-free unit share.
โCanyon has had a couple quarters of uncharacteristic weakness in tracked channels, which was caused by two factors,โ Mr. McMullian said. โFirst, a mix shift to channels that arenโt comprehensively measured by syndicated data. And second, a shortage of gluten-free capacity that impacted our ability to meet consumer demand.
โAdditional capacity is expected to come online in the second half of this year, and we have aggressive plans to reaccelerate our growth. We remain optimistic about the potential for Canyon, which remains solidly in the No. 1 market share position.โ
During the questions and answers, Mr. McMullian said promotional activity had picked up modestly.
โBut it is still well below historic or even pre-pandemic levels,โ he said. โSo no significant movements there. The interesting bit that weโre seeing is that even when we do promote, the incremental units arenโt terribly attractive. So we have to be very selective about when we do promotions to ensure weโre getting a good return on those promotions.โ
For the full year, Flowers Foods raised its earnings per share guidance to $1.18 to $1.25, versus previous guidance of $1.15 to $1.25. Adjusted EBITDA was upped to $503 million to $528 million, versus previous guidance of $494 million to $528 million. Sales in 2023 now are expected in a range of $5.095 to $5.141, up between 6% and 7% from last year and up from prior guidance of $5.086 billion to $5.141 billion.
In a review of the companyโs finances, R. Steve Kinsey, chief financial officer, said Flowersโ enterprise resource planning system went live in the second quarter and remains on track to be completed in line with the companyโs financial guidance. The upgrade is expected to cost $95 million to $105 million in 2023.
He said 93% of Flowersโ key raw material are covered at present.
โBased on current coverage, our guidance incorporates a moderate decline in commodity costs in the second half of 2023 relative to our initial expectations,โ he said. โHowever, inflation remains persistent, and we expect continued inflationary pressures into 2024.โ
As part of its updated guidance, Flowers Foods expects higher interest expenses and a slightly lower effective tax rate. Capital expenditures are projected in a range of $140 million to $155 million, up $5 million on both sides from previous guidance.
Year-to-date net income at Flowers Foods was $134.47 million, or 63ยข per share, down 3.4% from $139.27 million, or 65ยข, in the first half of 2022. Net sales were $2.76 billion, up 8%.
