THOMASVILLE, GA. — Sales volume fell sharply in the first quarter at Flowers Foods, Inc., prompting the company to reduce its financial guidance for the year. A. Ryals McMullian, president and chief executive officer, said private label baked foods continued to gain market share during the first quarter but expressed confidence that a trend toward premiumization remains in place.

“We believe that the premiumization of the category will remain a long-term trend and that when consumers get relief from the current inflationary pressures, they will return to our No. 1 brands and differentiated products,” Mr. McMullian said May 18 in prepared remarks.

Net income at Flowers Foods in the first quarter ended April 22 was $70.71 million, equal to 33¢ per share on the common stock, down 17% from $85.59 million, or 40¢ per share, in the first quarter last year. Sales were $1.53 billion, up 7% from $1.44 billion. Adjusted for special items in both years, earnings per share in the first quarter were down 14%. In the current year, a charge of $4.2 million was taken related to a “restructuring of plant operation responsibilities from the sales function to the supply chain function.” Adjusted EBITDA margin in the first quarter was 9.8%, down 170 basis points from 11.5% in the same period last year.

“Comparisons were impacted by input cost inflation, partially offset by inflation-driven pricing actions, lower employee compensation expense and reduced outside purchases of product,” said R. Steve Kinsey, chief financial officer.

Reflecting disappointing results in the first quarter, Flowers lowered its financial guidance for 2023. The company is forecasting adjusted earnings per share in 2023 of $1.15 to $1.25, down 5¢ on both sides from guidance issued in February and compared with $1.27 in 2022. With the revision, the company is projecting lower earnings in 2023 than 2022. In 2021, adjusted EPS was $1.24.

Sales guidance for 2023 has been revised to a range of $5.09 billion to $5.14 billion, versus the previous guidance of $5.18 billion to $5.24 billion. The revised range would be up 5.8% to 7% from 2022. Adjusted EBITDA was forecast at $494 million to $528 million in 2023, versus previous guidance of $513 million to $543 million and compared with $502 million in 2022.

In early trading May 19 on the New York Stock Exchange, shares of Flowers Foods, Inc. fell as much as $3.74, or 13%, slumping to $25.10 before bouncing back at mid-morning to $26.51.

The first-quarter sales gain of 6.9% reflected a 13.6% increase related to pricing/mix and a 0.6% contribution from the Papa Pita acquisition, partly offset by a 7.3% drop in volume. Flowers branded sales were $979.3 million, up 2.5%. Pricing/mix contributed 8.3% and Papa Pita added 0.5%, with branded volume down 6.3%. Other sales were $555.1 million, up 16%, including 23.1% from pricing/mix and Papa Pita adding 0.7%, with volume down 8.2%.

In his remarks, Mr. McMullian said inflation was a principal driver of first-quarter sales trends.

“Consumers are trading down to lower-priced products, responding more to promotions, and shifting more of their shopping trips to value-focused retailers,” he said. “Private label has reversed a multi-year trend of share losses, though its volumes are still well below pre-pandemic levels and the gains have largely occurred in the mass channel.”

During the quarter, private label gained 70 basis points of share, reflecting large gains in the mass channel, Mr. McMullian said. In the grocery channel, by contrast, private label lost 20 basis points of share.

Within the branded category, Nature’s Own unit share was flat during the first quarter and Dave’s Killer Bread gained 10 basis points. Canyon lost 80 basis points, but Mr. McMullian said the drop was attributable to a mix shift to club channel where he said sales aren’t comprehensively measured. Unit sales of Canyon products increased during the quarter, as measured by Flowers’ internal tracking, he said.

He also said that a surge in consumer demand for baked foods that started with the COVID-19 pandemic and continued afterward appears to have evaporated.

 “We’ve also seen volume revert toward pre-pandemic levels in the category overall,” he said. “During the pandemic, the category enjoyed a large increase in demand as consumers ate more meals at home, but that benefit has dissipated as consumers have reverted to eating more meals out of the home. The resulting unit volume pressure, which began in 2021, continued into the first quarter, but lessened considerably toward the end of the period.”

Volume decreases have been heaviest in the company’s cake and foodservice business, heightened when the company has rationalized business that was not meeting the company’s “profitability hurdles,” Mr. McMullian said.

The steepness of the volume drop, though, “has led to a temporary imbalance between capacity and production,” he said.

“Our supply chain optimization work is intended to address this imbalance, and we remain confident that our strategy is the right one for Flowers over the long term,” he added.

The imbalance was the subject of discussion in a question-and-answer session May 19 between Flowers executives and investment analysts. Asked about its effect, Mr. McMullian said Flowers would not quantify the impact.

“The imbalance was certainly a factor in the quarter,” he said. “It definitely is not the factor. The factor is the consumer and softness in the category.”

Longer term, Mr. McMullian said consumers will “return to their prior purchasing habits” when inflationary pressures ease.

“While at-home eating may never return to peak COVID levels, the work-from-home trends appears to be sustainable,” he said.

The sales drop was a principal point of discussion with the investment analysts.

“We did face difficult year-over-year comparisons in the quarter due to a strong impact from the omicron surge early last year and by some storm activity during the same time period,” Mr. McMullian said.

He went on to describe the decision to cut its guidance fairly early in the year as “likely being a little conservative,” noting “some pretty meaningful improvement” in sales trends later in the quarter.

Later, though, he acknowledged that the start of 2023 was “softer than we expected out of the gate.”

“And it was significant enough to make us perhaps be a little bit more cautious about the health of the consumer than we were at the start,” he said.

Flowers recently raised prices, and Mr. McMullian said it was too early to gauge the move’s impact on sales. He said Flowers did “promote a little bit more in the quarter.”

Mr. McMullian was pressed on the call to explain what a transitory shift in consumer demand toward private label means. He replied that it means the current situation will not be permanent.

“The reason I believe that is because eventually, we’re going to come out of this inflationary cycle,” he said. “Presumably, at some point, you have a recovering consumer. And when you think about our business in particular and the trade down to private label, I firmly believe that the premiumization of the category is a long-term trend. I do believe that people will come back to differentiation. I do believe that people will come back to our top brands. That’s why I believe that it’s temporary now is that two months? Is it six months? Is it nine months? Is it a year? I don’t know that. But I do believe it will come back.”

During the call Mr. Kinsey commented on the current ingredient market situation. He said the comparative picture was tough for the first half of 2023 because the company a year earlier benefited from favorable hedges. Inflation remains and will continue to be a challenging presence this year, he said.

“A lot of it is driven by other buckets other than flour across the input bucket,” he said. “Sugar is up. Gluten is up pretty significantly, and we use quite a bit of gluten because of — typically because of protein quality within the wheat. We’re also seeing yeast is up, honey, several other smaller or minor ingredients up.”