THOMASVILLE, GA. — After a year in which the company’s top bread brands enjoyed annual sales growth of 17% to 36%, Flowers Foods, Inc. is expected to see “at least some reversion” in 2021, said A. Ryals McMullian, chief executive officer.
Guidance for the new year was issued together with the release Feb. 11 of 2020 financial results.
Flowers Foods net income in the year ended Jan. 2 was $152.32 million, equal to 72¢ per share on the common stock, down 7% from $164.54 million, or 78¢, in 2019. Net sales were $4.39 billion, up 6% from $4.12 billion the year before.
Results in 2020 included a pension settlement and curtailment charge of $108.76 million. Adjusted net income was $278 million, up 36% from the year before. Adjusted EBITDA was $521.7 million up 23%. EBITDA margins were 11.9%, up 160 basis points the prior year. The gains were achieved despite a 2.9% volume decrease.
“I am pleased to report fiscal 2020 adjusted earnings above the high end of our guidance,” Mr. McMullian said. “The positive mix shift and the extra week boosted results, and our team leveraged those tailwinds by taking steps to maximize our performance in the near-term and beyond.”
Initial guidance for 2020 issued in February last year included sales of $4.21 billion to $4.29 billion, versus final sales of $4.39 billion. For adjusted EPS, initial guidance was $1 to $1.08, versus the final adjusted earnings of $1.31. Flowers said the additional week (accounted for in the initial guidance) accounted for 2¢ of the earnings. The final figures also beat revised guidance issued after the third quarter of $4.35 billion to $4.37 billion for sales and $1.23 to $1.28 per share for adjusted EPS.
Fourth-quarter net income was $55.82 million, or 26¢ per share, up dramatically from $2.22 million, or 1¢, in the fourth quarter of 2019. Net sales were $1.02 billion, up 11% from $917.76 million.
Results in the fourth quarter of 2019 included restructuring charges of $17.5 million, up from $4.8 million in the same period in 2020. Adjusted earnings in the fourth quarter of 2020 were $59.1 million, up 55% from the year before.
The strong results in 2020 reflected the effects of the pandemic but also increases in marketing and advertising spending, Mr. McMullian said. Increases were focused especially on digital spending and targeted at driving growth of branded product sales. Mr. McMullian said the effort paid dividends with annual growth rates of about 17% for Nature’s Own, 31% for Dave’s Killer Bread, 28% for Wonder and 36% for Canyon Bakehouse.
“The pandemic has driven extraordinary levels of product trials, and we are doing everything in our power to encourage repeat purchases,” Mr. McMullian said.
Breaking down fourth-quarter results, R. Steve Kinsey, chief financial officer and chief administrative officer, said the 11% sales gain breaks down as 8.2 points of increase from the extra week and 7.7 points from price/mix contributing with a 4.4-point drag for falling volume. Mr. Kinsey attributed the price/mix jump mostly to stepped-up branded sales with more at-home eating. The volume drop reflected weakness both in store branded, foodservice and other non-retail channel sales.
Foodservice and other non-retail sales fell 7% to $210.5 million. In private label, Mr. Kinsey said Flowers’ sales declines were in line with industry trends — falling from 23.1% in 2019 to 20.4% in 2020, and down from 25.8% share in 2015.
For 2021, Flowers projected sales of $4.21 billion to $4.3 billion, down 4% to down 2% from 2020. Adjusted for the extra week in 2020, sales are expected to be down 2.2% to 0.2%. The company’s earnings per share are forecast at $1.07 to $1.17, with a 2¢ impact because of the shorter week. Adjusted earnings were $1.31 in 2020.
“In 2020, our performance significantly exceeded those targets and therefore it is reasonable to expect at least some reversion, especially since 2021 will have one fewer week than 2020,” Mr. McMullian said.
Specific factors expected to precipitate the reversion include a mix shift toward foodservice, with tighter margins, as the pandemic eases; the possibility of stepped-up promotional spending; higher commodity costs during the second half of the year and investments in a digital initiative, Mr. McMullian said.
“Partly offsetting those factors are expected benefits from our brand investments and continued savings from portfolio optimization and operational efficiencies,” he said. “We are investing in our business at a time when visibility may be more limited than normal, but it is clear that we are on the right path. Regardless of the demand environment in the coming years, our team is determined to drive performance in-line with our long-term financial targets.”
Mr. McMullian described 2021 as a “transition year” noting that the company has committed to stepping up investments in the new year, particularly in the area of digital. He said these investments alone are expected to shave 5¢ from EPS in 2021. The investments are expected to begin yielding benefits the following year.
Even with these elevated costs, he said the guidance for the new year falls at the mid-point of Flowers’ long-term growth targets when using 2019 as the base year.
Acknowledging that prospects for 2021 carry considerable uncertainty, Mr. McMullian identified three major “levers to keep an eye on during the year:”
- Mix reversion: sales could revert to historical trends more deeply than projected, and margins may be adversely affected;
- Commodity inflation poses threats to surpass the company’s ability to recoup such costs through cost savings, efficiency enhancements and pricing;
- The promotional environment has held steady through the first month of 2021, but a significant uptick later in the year “could negatively impact our results as we move through the year,” he said.
Beyond the stable promotional activity so far this year, Mr. McMullian said Flowers’ overall operating environment early in the first quarter has remained relatively consistent with what prevailed in the final months of 2020.
“Some of the factors we considered when setting sales guidance included the impact of the pandemic and how long consumer behavior would continue to reflect remote working and learning,” Mr. McMullian said. “In addition, our earnings guidance took into consideration inflationary commodity costs and expenses related to our growth initiatives, including our strategic digital initiative.”
That Flowers is pursuing significant change even while recording strong financial results reflects a determination not to “rest on our laurels,” Mr. McMullian said. He said the changes are necessary to position the company for success “in any market environment.”
Flowers digital initiative, which includes a vision Mr. McMullian articulated of a “bakery of the future” does not obviate the need for Flowers to quickly address challenges facing the company’s bakeries of the present.
Mr. McMullian said the company will continue working to enhance results at underperforming operations, including the Navy Yard plant in Philadelphia.
In addition to digital initiatives, the company is investing in cost containment efforts, which Mr. McMullian said were crucial given the recent escalation in freight and commodity costs.
“Flowers is in the midst of a transformation, and we have a number of initiatives underway to drive growth and enhance profitability,” he said.
In September, Brad Cashaw joined Flowers as chief supply chain officer and, two months later, Eric Mathis joined the company as senior vice president and chief procurement officer.
Playing a central role in the transformation initiatives will be Heeth Varnedoe, named chief transformation officer in 2020.
“Heeth is a seasoned Flowers executive with years of operational experience who carries enormous credibility in the organization,” Mr. McMullian said. “It is important to note that Heeth was the leader of our portfolio optimization efforts last year that overdelivered on results.”