THOMASVILLE, GA. — “Our team is not happy with where we are, and we are doing everything that is possible to get back on track,” said Allen L. Shiver, president and chief executive officer of Flowers Foods, Inc. “And we feel very confident that is going to take place.”
Responding to questions during an Aug. 11 conference call, Mr. Shiver said the company he leads holds the pieces of the puzzle needed to do better.
“We have the best brands and the best management team, some of the most efficient bakeries in the category, and it is our job to make sure that we grow in line with our expectations,” he said.
Mr. Shiver’s comments followed a downward revision of earnings guidance for 2016 and quarterly results that fell short of Wall Street expectations, a downward revision of earnings guidance for 2016 and the announcement of Project Centennial, an operations review and potential restructuring program. Accenture has been engaged to assist Flowers with this initiative.
The company updated its guidance for 2016, projecting earnings per share in the range of 88c to 93c. The revision represents a 180 degree reversal from a quarter earlier when the company raised its 2016 guidance by 2c per share, to $1 to $1.06. Earnings were 92c in fiscal 2015. The company’s sales guidance was lowered to $3,930 million to $3,986 million. The previous guidance had been $3,986 million to $4,080 million, compared with $3,779 million in 2015.
As previously reported, net income of Flowers Foods in the second quarter ended July 16 was $51,155,000, equal to 24c per share on the common stock, down narrowly from $51,760,000, or 24c per share, in the same period a year ago. Sales were $935,025,000, up from $888,795,000. The sales gains were attributed to newly acquired brands. On an organic basis, sales declined modestly.
Mr. Shiver attributed the downward guidance revision to “the combined effect of the softer-than-expected marketplace” and investments Flowers is making to support growth in expansion markets. Still, he was frank about his executive team’s disappointment.
“There is no one here that is satisfied with the results we have been reporting,” Mr. Shiver told the analysts.
Investor sentiment was similar. In trading Aug. 11 on the New York Stock Exchange, Flowers shares fell $1.20 per share, or 7%, to $14.95. A new 52-week low of $14.35 was reached, and the company’s stock closed down 27% from a year earlier.
Mr. Shiver said during the call he would not elaborate further on a recent disclosure the company was subject to a Department of Labor investigation, other than that Flowers would cooperate fully with the agency.
Much of the call was devoted to helping identify particular areas of weakness at the company. As has been the case for several quarters, core Flowers products in core Flowers markets have underperformed, Mr. Shiver said.
The weakness has occurred amid general softness in the bread category. Mr. Shiver said packaged bread sales declined 0.4% in dollars during the quarter with unit sales weaker still. Store brands have felt the greatest brunt of the category pressure, but Mr. Shiver also cited a difficult environment for a Flowers sweet spot — branded traditional loaf bread.
“In the second quarter we experienced acute pricing pressure in the traditional loaf segment where we saw high promotional activity in our core markets,” Mr. Shiver said. “Traditional loaf bread is a product category that is key to our branded retail business.”
Not only has the company’s core category — traditional branded loaf bread — faced challenges, Mr. Shiver identified its core brand as facing particular struggles.
“I would say that our Nature’s Own brand is probably the brand that has been under attack the greatest from marketplace pricing,” he said. “And from — as far as the activity and the adjustments that we have made, they are primarily with our Nature’s Own soft variety brand and making sure that we have competitive price — promotional pricing going forward.”
The challenges facing the business are not cause for undue alarm or an overreaction by management, Mr. Shiver said.
“For those on the call who have followed Flowers for a long time, you will remember that we have experience navigating periods of heightened promotion activity,” he said. “As we have successfully done in the past, we are already taking action to protect our position in the marketplace.”
Pressed by an analyst on what will be needed to make sure Nature’s Own does better, Mr. Shiver said, “I don’t think we need to overreact on the pricing environment. I mean, this category has always been very active from a pricing standpoint, and we know exactly how to deal with that.”
Mr. Shiver highlighted numerous positives recorded in the second quarter. For example, the period was the first in which the company began delivering freshly baked Dave’s Killer Bread within the company’s direct-store delivery network. He said the move “dramatically increased distribution of the best-selling organic bread brand in the country.”
Weekly sales of D.K.B. were up 24% in the second quarter from the first quarter, Mr. Shiver said.
The conversion of the company’s Tuscaloosa, Ala., plant to organic bread production also represented good news, and Mr. Shiver said he expects similar positives from the company’s Alpine organic bread, a warehouse distributed product, in the coming quarter.
“Every day we are producing more of our organic breads in house, which lowers cost and improves quality,” Mr. Shiver said. “While Alpine sales are below our outlook due to business coming on later than expected, a key strategic focus for the quarters ahead will be to leverage our warehouse distribution capabilities to grow Alpine. I am confident in Alpine’s future.”
Mr. Shiver also was upbeat on the company’s expansion of its direct-store delivery network into the Pacific Northwest and its cake business.
“With extension of our D.S.D. network into the Pacific Northwest we are using targeted digital advertising to drive awareness for Nature’s Own,” he said. “Cobblestone right sized bread continues to grow and recently earned industry recognition for innovation.
“Our cake business had a strong quarter with both Tastykake and Mrs. Freshley's growing units and dollars based on our internal sales data. Tastykake posted solid mid-single-digit growth driven by the marketing partnerships and seasonal items.”
Mr. Shiver tipped his cap once again to the success Hostess has achieved in the market but said the Flowers snack cake business was doing well.
“We are up in our cake business, both Tastykake and Mrs. Freshley’s,” he said. “And Hostess has done a good job of bringing that brand back into the marketplace. And again, I think it shows the power of brands in this particular category. But we are still very bullish at growing our cake business.”
Expanding on the decision to launch Project Centennial, Mr. Shiver cited the need for Flowers to be positioned to succeed even when market conditions grow more difficult. The program has been launched at a time when Flowers profits are under pressure in the face of numerous tailwinds, including lower ingredient, packaging and utilities costs.
“We recognize that regardless of the competitive environment or changes in consumer behavior, we need to always be looking for new ways to continue to take advantage of those opportunities we have to grow and create value, not just today but over the long term,” he said. “And that brings me to Project Centennial. First, the name of the project is a reflection of our upcoming 100-year anniversary since Flowers founding in Thomasville, Ga., in 1919. Simply put, the project is an in-depth review of our business and operations, focusing on ways that we can grow sales, simplify our business and improve profitability. We are still early in the process, but we are excited about the potential, and we will share additional details in the coming quarters.
“It’s important to remember this is a long-term business. And even though things can change from quarter to quarter, I am confident that, just as we have done in the past, going forward Flowers Foods will continue to excel. And that is why we are still confident in the goals we spelled out at our investor briefing in April. Over the long term excluding acquisitions we expect sales to grow 2% to 4% driven by organic brands, our expansion markets and opportunities we have in our core. Combining the top-line growth with our EBITDA margin target of 12% to 14%, we expect to deliver e.p.s. growth of 8% to 10%. Add on a strong dividend yield and that is a formula for solid total shareholder returns.”
He seemed to acknowledge that major acquisitions and subsequent integrations have taken a toll on the company’s ability to operate on all cylinders, at least for now.
“We have added almost 1,000 D.S.D. routes in the last three to four years,” Mr. Shiver said. “So, we have had a lot of opportunities from an acquisition standpoint bringing new bakeries into the fold and so forth. Now the focus is on really settling down the business, looking at our business model and making sure that we are focused on not only growing the top line but also on margin improvement. And again, one of the reasons why we are excited about the Project Centennial, because now we have time to take a look at the overall business structure.”
Asked by an analyst whether Project Centennial was driven by industry changes “a la 3G” to dramatically change the Flowers’ cost structure, Mr. Shiver said the decision came from within.
“This is not something that is coming from anywhere else,” he said. “I mean this is a project initiated by our leadership team.”
He predicted the effort would generate considerable cost savings.
“But I think equally important is growth opportunities connected to sales and adjacent product categories,” he said. “So we’ll also be looking at how do we grow the top line and at the same time how do we make our business model more efficient. And the outside help that we will be receiving from Accenture will help accelerate both of those initiatives.
“So again, we don’t have any numbers to give you today, but we are about four or five weeks into the project.”
While he did not elaborate on what will be involved in the initiative, Mr. Shiver said results will be evident well before the Flowers centennial in 2019.“We are expecting to start to see improvements coming out of the project as early as by the end of this year, possibly into the first quarter of next year,” he said. “So just because the name is Project Centennial we will start to see benefits way ahead of that.”