THOMASVILLE, GA. โ The third quarter proved to be a bit of a mixed bag for Flowers Foods, Inc. While the company benefited from strong bun season execution attributed to a news sales and supply chain structure, an uncertain economic environment encouraged some consumers to trade down to private label products. Flowers also felt the sting of a hefty settlement agreement related to its independent contractor misclassification case.
Once the dust had settled, Flowers sustained a loss of $46.73 million in the third quarter, which compared with net income of $40.53 million, equal to 19ยข per share on the common stock, in the third quarter last year. The most recent quarter included more than $137 million in legal settlements and related costs associated with an agreement to settle distributor-related class action litigation in California.
On Aug. 29, Flowers agreed to settle distributor-related class action litigation in California. The settlement โprovides for a $55 million common fundโ for payment to about 475 plaintiffs and to cover legal costs and other expenses. Over time, Flowers will repurchase about 350 distribution rights in California and will serve the market with an employment rather than an independent distributor model.
Flowers estimated that the cost of the repurchases will be about $65 million, an amount higher than previously announced. The costs were all recorded in the third quarter of 2023. The agreement is subject to court approval, anticipated early in 2024. In notes to the companyโs Form 10-K filed in February, Flowers said it was defending seven lawsuits seeking class and/or collective action. Among cases that had not yet had its class action status certified or dismissed is a 2016 case filed against the company, Flowers Foods Co. of Bradenton LLC and Flowers Baking Co. of Villa Rica, LLC.
Adjusted net income during the quarter was $61.7 million, down 4.5% from a year earlier. Adjusted EBITDA was up 0.6% with EBITDA margins of 10.1%, down 30 basis points from last year.
Sales were $1.2 billion, up 3.5% from $1.16 billion in the same period in 2022.
Flowers retail sales rose 3% during the third quarter, to $771.2 million. The sales gains were attributed to price increases by Flowers, improved mix from greater branded organic product sales and the contribution from the acquisition of Papa Pita. Overall, pricing and mix contributed 2.8% of growth in the third quarter, and the Papa Pita acquisition 1.3%, while volume was down 1.1% in the quarter.
โWe continued to execute well in the third quarter,โ A. Ryals McMullian, president and chief executive officer, said in pre-recorded remarks Nov. 9. โDespite the challenging environment, we achieved record sales driven by growth in both our Branded Retail and Other categories. That growth benefited from pricing taken earlier this year, but itโs also important to highlight that our Branded Retail volumes improved sequentially, down only 1.1% compared to the 6.3% and 1.5% declines in the first and second quarters, respectively. Volume trends in our Other category also improved, as the impact of business rationalizations designed to improve the profitability of that business moderated.
โOn our last call we noted our expectation that these planned business rationalizations would moderate in the second half of 2023. And that trend is playing out, though the timing of certain business exits did come sooner than planned. Combined with lower-than-normal storm activity, these business exits led to third-quarter sales below our expectations and an adjustment in our 2023 sales and EBITDA guidance. Although the timing was unplanned, such exits are the natural result of our portfolio strategy, which is driving meaningful improvement in the margins of our foodservice business. I am encouraged by the progress we are making in enhancing the profitability of this category and expect continued improvement moving forward.โ
For the full year, Flowers is lowering its sales to $5.085 billion to $5.104 billion, up 5.8% to 6.2% from 2022. Previous guidance was $5.095 billion to $5.141 billion. The companyโs earnings per share forecast was left unchanged at $1.18 to $1.25 a share.
Mr. McMullian said Daveโs Killer Bread and Wonder showed particular strength during the third quarter, increasing unit share by 20 and 10 basis points, respectively.
โDKB was a particular standout, outpacing both the bread category overall and the organic subcategory,โ Mr. McMullian said. โThe brand continued to prove that consumers are willing to pay premium prices for differentiation and superior quality and taste, even in the current economic environment. In contrast to the overall bread category, where units in tracked channels declined 2.2%, DKB grew overall units 5.6%, with units up in each business cell โ loaf, buns, and breakfast. That performance resulted in noteworthy share gains, with a 20 basis point improvement in unit share of fresh packaged bread, 160 basis points in the specialty loaf category, and 290 basis points in the organic category.
Natureโs Own, meanwhile, lost 10 basis points of unit share in the quarter, he said. Despite losing some unit share, Mr. McMullian highlighted the success of Natureโs Own Keto bread, a product he said โdemonstrates our ability to meet changing consumer preferences.โ
โThis newly introduced product has been a hit with consumers since its rollout in the second quarter, and has been gaining share rapidly, with unit share up 440 basis points in the quarter,โ he said. โAnd those share gains are largely incremental, with the majority of sales coming from consumers who are new to Natureโs Own and Flowers.โ
Mr. McMullian said specialty loaf, sandwich buns and rolls, and breakfast achieved โhistorical highsโ for the third quarter with unit share in each of these subcategories up a respective 150, 40, and 20 basis points.
โSandwich buns and rolls benefited from outstanding bun season execution, much of which can be attributed to the improved focus resulting from our new sales and supply chain structure,โ he said. โImportantly, we have maintained our positive momentum into the fourth quarter, gaining more than 20 basis points of unit share in the bread category in each of the first three weeks.โ
In the companyโs second-quarter conference call, Flowers said sales of its Canyon-branded products had been dragged down by a mix shift to channels that arenโt measured by syndicated data as well as a shortage of gluten-free capacity that constrained the companyโs ability to meet consumer demand. Providing an update, Mr. McMullian said Flowers has resolved the capacity issue and has implemented aggressive plans to reaccelerate growth.
โWe are resuming promotions, restarting production of discontinued SKUs, and reinvigorating our innovation pipeline,โ he said. โAlthough units declined in the quarter versus the prior year as we brought on new capacity, sales improved in each consecutive period in the third quarter. And the timing of this push couldnโt have been better, as October was Gluten Free Awareness Month. We remain optimistic about the potential for Canyon, which remains solidly in the No. 1 market share position.โ
Mr. McMullian said Flowers continues to monitor consumer trends, specifically the potential impact of GLP-1 agonists. To date, the company hasnโt seen any change in demand, he said.
โHowever, we think our brand portfolio is well positioned to benefit should these drugs gain traction,โ he noted. โMany of our products, including those of our strongest brands, such as DKB and Canyon Bakehouse, have health attributes that we believe would complement the potential benefits of GLP-1s. Research seems to show that consumers taking these drugs tend to seek out healthier foods, which we believe could drive demand for some of our breads and snacks. We plan to conduct research to better understand the potential impact of these drugs and how our products might satisfy consumer needs in this area.โ
In the 40 weeks ended Oct. 7, Flowers net income was $87.74 million, or 41ยข per share, down 51% from $179.8 million, or 84ยข per share, a year earlier. Sales were $3.96 billion, up 6.4% from $3.72 billion.
