Flowers Foods breads - Nature's Own, Wonder bread, Sunbeam
While Flowers’ “traditional loaf” branded sales were down 2.5%, competitive brand unit sales were up 1.7% and private label sales fell 6%.

THOMASVILLE, GA. — In the face of market share losses in bread and cake, Flowers Foods, Inc., Thomasville, is taking numerous steps to improve the company’s competitive market position.

The competitive actions and first-quarter results were discussed by Flowers executives in a May 19 conference call with investment analysts.

As previously reported, Flowers Foods net income in the first period ended April 23 was $59,363,000, equal to 28c per share on the common stock, down 3.3% from $61,389,000, or 29c per share, in the same period a year ago. Sales were $1,204,352,000, up 5% from $1,146,045,000.

Drilling into results during the quarter, Allen L. Shiver, president and chief executive officer, said Flowers bread pricing rose 2.2% in the period, a gain that came at the expense of unit volume, which fell by 2.5%.

Allen Shiver, Flowers Foods
Allen Shiver, president and c.e.o. of Flowers

“While we increased price, competitive pricing overall in the marketplace compared to the fourth quarter was down,” he said. “We saw competitors increase promotions, which impacted our volumes during the quarter, and drove the decline in our branded sales excluding acquisitions.”

He said the company’s branded bread sold at a 25c premium per loaf in the fourth quarter of 2015, a figure that widened to 34c in the first quarter of 2016.

Mr. Shiver illustrated the competitive outcome in a slide of Information Resources, Inc. bread unit sales data during the first quarter. While Flowers’ “traditional loaf” branded sales were down 2.5%, competitive brand unit sales were up 1.7% and private label sales fell 6%.

An even more difficult situation prevailed in the cake market, where Flowers dollar sales fell 2.7%, and unit sales fell 4.2%. Volume overall in the cake category was up 0.2%.

Flowers Foods cakes - Tastykake, Mrs. Freshley's
In the cake market, Flowers dollar sales fell 2.7%, and unit sales fell 4.2%.

A range of actions was outlined by Mr. Shiver to contend with the challenging competitive situation.

“Given the current business environment, we are focused on being efficient across our operations,” he said. “We are leveraging new technology resources to better plan promotional programs and add incremental volume. To reduce stales, we have a project under way to improve order forecasting. To improve manufacturing efficiencies, we are reallocating production among our bakeries to maximize throughput and minimize downtime. To bring underperforming bakeries up to their potential, we have stepped up training of those bakeries, transferring best practices throughout the company.”

During questions and answers, Mr. Shiver elaborated on pricing plans.

“So, basically, what we're doing looking forward, is making sure that we have a better balance between promotional activity and our overall price increases,” he said. “We'll continue to sell at a premium versus the market.”

He said the company was seeking the “everyday right price for items in a given marketplace,” to optimize displays and generate growth. He also described plans to move to “more of a normalized promotional activity schedule.”

R. Steve Kinsey, executive vice-president and chief financial officer, also spoke of getting the balance right.

R. Steve Kinsey, Flowers Foods
R. Steve Kinsey, executive vice-president and c.f.o. of Flowers

“Not to get into the overall pricing strategy on promotions, I do feel like -- from a balance perspective, while you may not see – you’ll see some pressure probably on price mix,” he said. “But hopefully, we’ll get the volume lift to offset that from a dollar perspective.”

Flowers’ newly acquired bread brands, Dave’s Killer Bread and Alpine Valley, were a source of strength during the quarter, Mr. Shiver said. He expressed confidence the company would reach its objective of $255 million in sales in 2016, including $165 million for D.K.B. and $90 million for Alpine Valley. During the first period of the year, sales of the brands totaled $60 million, including about $43 million for D.K.B. and $17 million for Alpine. The Alpine sales accounted for more than 8% of Warehouse Segment sales during the period.

Fueling his optimism about prospects for the brands, Mr. Shiver said the organic bread market in the first quarter of 2016 was 23% larger than the same period a year earlier.

Flowers Foods organic breads - Dave's Killer Bread, Alpine Valley
Flowers’ newly acquired bread brands, Dave’s Killer Bread and Alpine Valley, were a source of strength during the quarter.

“Our distributor partners are capitalizing on this momentum, by gaining store space and adding special displays,” he said. “Essential to the successful launch was the conversion of our Tuscaloosa (Ala.) bakery to an organic facility to produce both D.K.B. and Alpine. This was no small feat, especially considering the unique production techniques and specialized equipment install.”

Offering a touch of color on the project, Mr. Shiver said manufacturing personnel from D.K.B.’s headquarters in Portland, Ore., traveled to Tuscaloosa, “training the team, and working to ensure a consistent product.”

Stepped-up spending on marketing gives Mr. Shiver further optimism about sales prospects moving forward.

“In addition to traditional media, our marketing teams have done an excellent job gaining exposure for our brands through blogs, e-mail marketing and earned media spots,” he said. “To invigorate our snack cake sales, we recently introduced new products in packaging such as minis, limited-time flavors, and single-serve packaging options. We also have a strong pipeline of new products that will be coming into the market over the remainder of the year.”

While he did not elaborate on pending new product introductions, Mr. Shiver referenced plans again later in the call, during discussions of the company’s Nature’s Own brand.

“We're looking at other opportunities within the soft variety-bread segment that we feel that will be certainly in sync with consumer desires,” he said.

Hostess plant sold by Flowers Foods
During the quarter, Flowers sold two of its acquired Hostess facilities and plans to sell three more.

Mr. Kinsey described progress at cutting the carrying costs associated with the company’s acquisition of bread baking assets from Hostess. During the first quarter, the costs totaled $3.9 million, down 26% from $5.3 million in the first quarter of 2015.

“During the first quarter, we were able to sell two of the acquired facilities,” Mr. Kinsey said. “In connection with one of the properties sold, we recognized the loss during the quarter of approximately $800,000. Currently, we have listed for sale three non-strategic facilities, with four remaining under a strategic review.”

A widening price spread between Flowers and competitors contributed to the company’s share loss during the quarter,

The company noted its higher E.P.S. guidance includes accretion from the recently announced accelerated share repurchase. The new guidance of $1 to $1.06 per share was up 2c on both sides from initial guidance a quarter ago.