THOMASVILLE, GA. — For a second straight quarter, Flowers Foods, Inc. has issued a downward revision in its sales and earnings guidance for fiscal 2014. The latest adjustment was issued in connection with the release of third-quarter financial results. With the revisions, sales during the year may be lower than in 2013 and earnings are expected to be down.
Net income of Flowers Foods in the third quarter ended Oct. 4 was $44.4 million, equal to 21c per share on the common stock, up 16% from $38.4 million, or 18c per share, in the third quarter of 2013. Net sales were $849.4 million, down 3.3% from $878.5 million.
Allen L. Shiver, president and chief executive officer of Flowers, attributed the earnings gain in the face of lower sales to the company’s focus on “serving the market and maintaining efficient operations.”
“Manufacturing efficiencies improved both sequentially and year-over-year,” he said. “We are seeing improvement at our Lepage operations, and I am confident in the team’s ability to further enhance profitability there.”
While Flowers has enjoyed sequential sales growth from brands acquired from Hostess and new geographic markets, the gains were not sufficient to overcome broader market pressures, Mr. Shiver said.
“Overall the environment remains competitive as participants use price to gain volume,” he said. “Even though we are not immune from the headwinds facing the food industry, we believe that our category is stable and our long-term growth prospects are encouraging.”
Flowers revised its guidance for 2014 sales to a range of $3.75 billion to $3.77 billion. A quarter earlier, Flowers was forecasting full-year sales of $3.88 to $3.94 billion and a quarter before that the range was $3.976 billion to $4.126.
At the low end of its latest guidance, Flowers is predicting sales that would be slightly down compared with $3,751,005,000 in 2013. Its initial guidance had forecast generous sales growth of 6% to 10%.
Earnings per share guidance was revised downward to 86c to 90c per share, versus the 92c to 98c the company projected for the full year a quarter earlier and 98c to $1.05 forecast initially and affirmed after the first quarter. Even at the high end of the company’s latest forecast for 2014, adjusted earnings per share would fall shy of 2013 profits, which were 91c per share.
“We are working to right-size the business to better align with the near-term market realities, without sacrificing our longer-term prospects for growth, and our revised guidance incorporates the effects of the market issues we have discussed,” Mr. Shiver said of the guidance revision. “Our team is focused on making sure our cost structure is aligned with our sales volumes as they stand today. We believe our strategy is sound, and we remain committed to those factors that will ultimately determine our long-term success — growing our market share by better serving our core and expanding our geographic reach.”
Breaking down the 3.3% sales decline in the third quarter, to $849.4 million, Flowers said a positive net/price mix of 1.1% was offset by a 4.4% drop in volume. The mix benefit reflected a favorable shift toward branded bread and rolls from cake and store branded products. The benefits were “partially offset by a competitive pricing environment.”
Mr. Shiver said branded bread and roll sales rose 1.4%, which he said demonstrates the “strength of the acquired brands and Nature’s Own, and consumer shifts to branded products from store-branded products.”
Sales of acquired brands rose 7.8% in the third quarter from second-quarter levels. Mr. Shiver didn’t specify the corresponding decline in cake sales.
The net income improvement in the third quarter was helped by a gain of 110 basis points in gross margins, to 47.8%, versus 46.7% a year earlier. In addition to improved manufacturing efficiencies, the company cited reduced outside purchases and lower input costs as helping margins.
During the quarter, Flowers offered certain former employees a one-time lump sum of vested pension benefits. Based on initial acceptances, the company said its total plan obligations will be reduced by 10%. At the same time, the company said it expects to record a one-time, non-cash settlement charge of $14 million to $15 million in the fourth quarter. The charge, equating to 4c to 5c per share, was not incorporated into the company’s revised guidance. Flowers said distributions to participants will be made from existing plan assets.
Also during the quarter, Flowers sold certain assets of Leo’s Foods, a tortilla operation in Fort Worth, Texas. The company said it transferred flour tortilla manufacturing equipment from the Fort Worth plant to a Flowers baking plant in San Antonio, and will serve the flour tortilla market from that location.In the nine months ended Oct. 4, Flowers net income was $147,729,000, equal to 69c per share, down 23% from $192,374,000, or 91c per share. Net sales were $2,886,498,000, down 0.7% from $2,907,455,000.