THOMASVILLE, GA. — New products continue to generate strong growth at Flowers Foods, Inc., and the company has a strong pipeline of product innovation both recently introduced and pending, said A. Ryals McMullian, president and chief executive officer.
Commenting on Flowers first-quarter results, Mr. McMullian said gains in Canyon Bakehouse and Dave’s Killer Bread were accompanied by only modest setbacks for Nature’s Own, relative to pandemic-inflated sales generated in the first quarter of 2020.
“Even with the difficult prior-year comparisons of peak pandemic demand, tracked channel sales of Canyon Bakehouse and Dave’s Killer Bread rose, grew approximately 14% and 7%, respectively, versus the prior-year period, while Nature’s Own declined only 3.5%,” Mr McMullian said May 20 in prepared remarks. “Comparing our first-quarter results to the pre-pandemic levels of 2019, Canyon, Dave’s Killer Bread, and Nature’s Own rose approximately 101%, 42%, and 16%, respectively.”
In the first quarter ended April 24, Flowers Foods net income was $71.66 million, equal to 34¢ per share on the common stock, compared with a net loss of $5.77 million in the first quarter of fiscal 2020. Sales were $1.30 billion, down 3.5% from $1.35 billion in the first quarter last year but up 3% from $1.26 billion in the first quarter of 2019.
While Flowers raised the low side of its sales and earnings guidance for 2021, the company’s share price gave ground in early trading May 21 after the earnings release. Flowers shares at mid-morning were as low as $23.80 per share, down 3.5% from the previous close.
Results in 2020 included a $116.21 million charge in connection with a pension plan settlement and curtailment loss. Results in the current year included a loss on the extinguishment of debt totaling $16.15 million. Adjusted earnings per share was 41¢, unchanged from a year earlier.
Mr. McMullian said Flowers hopes to sustain the momentum of its new products.
“Recent introductions include both Dave’s Killer Bread and Nature’s Own Perfectly Crafted Rye breads, Nature’s Own Perfectly Crafted flatbreads, and Wonder English muffins that aim to grow our share in product segments where we are underrepresented,” he said. “Our entry into rye and flatbreads target $300 million and $228 million markets respectively where we have been absent until now.”
More generally, Mr. McMullian said the company’s leading brands are “thriving.”
“As the economy reopened in most of the country, our branded retail mix moderated somewhat toward the end of the quarter and foodservice began to recover,” he said. “However, it is important to note that branded retail demand remains elevated over pre-pandemic levels. To maintain our momentum and sustain the growth of our brands, we are continuing to invest in innovation and marketing.”
Breaking down the quarterly results, Flowers said the 3.5% drop in sales reflected a volume decline of 6.9%, partly offset by improved pricing and mix boosting sales by 3.4%. First-quarter sales in 2020 were up 6.8% from the year before.
The price/mix improvement was the principal force behind a 30-basis-point boost in EBITDA margins in the quarter, said R. Steve Kinsey, chief financial officer and chief administrative officer. EBITDA margins were 12.4% in the 2021 quarter.
“We do see some indications of mix reversion,” Mr. Kinsey said. “Our first quarter is 16 weeks, and, therefore, our first quarter 2020 comparisons may be more impacted by the pandemic-related demand increase that occurred in March through mid-April than our peers were.”
Branded retail sales were down 3.3% in the first quarter of 2021, private label was down 15% and non-retail and other sales rose 3.6%.
“Branded retail sales decreased primarily due to volume declines in white and soft variety bread, as well as cake, partially offset by volume growth in organic and gluten-free products and favorable price/mix,” Flowers said. “Store branded retail sales decreased primarily due to volume declines as consumer purchasing shifted to branded retail products.”
With the drop in private label sales, branded baked foods sales represented 66.1% of total Flowers revenues in the first quarter, up from 59.9% in the first quarter of 2019.
Whether this percentage holds going forward remains to be see, Mr. McMullian said. Through the first several weeks of the second quarter branded sales have remained strong, but he said the company will closely watch patterns when schools reopen in the fall.
Flowers revised its guidance for 2021, raising the low side of its projected range both for sales and earnings per share. At $4.23 billion to $4.3 billion, the company’s sales forecast would be off 3.5% to 2% from 2020 sales. Of the decline, 1.8 percentage points reflects the effect of one fewer week in fiscal 2021. The low end of the range was raised $22 million from $4.21 billion. At $1.10 to $1.17, the forecast for diluted earnings per share compared with an original forecast of $1.07 to $1.17. Adjusted earnings per share in 2020 were $1.31 and in 2019 were 96¢.
“Our updated guidance range is now fully within or above our long-term financial target ranges of 1% to 2% sales growth and 7% to 9% EPS growth off the 2019 base, even with the 5¢ headwind from our digital/ERP initiatives,” Mr. Kinsey said.
The Flowers executives addressed the prospects for a more inflationary environment in 2021 and, potentially into 2022. Mr. McMullian said the company was hedged for now and prepared to take action if high costs persist.
“In the shorter term, our buying strategies help mitigate inflationary pressures,” he said. “If these higher prices persist, over the longer term we will address them using the levers at our disposal. Price is obviously the most powerful of those levers and we have been successful in using price to minimize the impact of higher costs. Another lever is trade spend efficiency, which has improved over the last several years as we’ve leveraged new trade promotion management tools. And of course, it’s always incumbent upon us, inflation or no inflation, to continue to improve our own efficiencies.”
Mr. Kinsey conceded that while Flowers anticipated inflation going into 2021, markets have been more volatile than the company expected. He suggested Flowers has hedged its major ingredients for the full calendar year.
“Where possible, we’ve fixed input costs for the remainder of 2021, but cost inputs that do not offer forward buying could cause some inflationary pressures in the second half,” he said. “While we still have a good bit of 2021 remaining, should commodity prices stay at current levels, we would expect meaningful inflation in 2022.”
On a more hopeful note, Mr. McMullian, in a call with analysts May 21, said recent new product introductions were performing well and expressed confidence about the outlook for new products to be introduced in coming months.
“We’re really pleased with the flatbreads that we introduced in the Northeast,” he said. “Obviously, continuing to innovate with Dave’s. The ryes out there, it’s doing great, right on target, great reception from consumers… And then further out, we’re standing up our agile innovation team. It’s early days. We’re just getting ramped up. But the early prototypes — they’ve shown me of some of the things that we’re looking at — are just outstanding. So there’s a lot of great things to come. And we all know how important innovation is going to be for us to continue to grow our top line in line with the long-term targets.”