Flower Foods is gaining strength in the bread market | 2020-05-15

THOMASVILLE, GA. – At the height of business in March, Flowers Foods, Inc. sales were up 70% from the same week a year earlier, said A. Ryals McMullian, CEO. Mr. McMullian credited Flowers’ long experience in hurricane preparedness and response and the company’s drop-shipping capabilities for generally keeping retail shelves full and helping Flowers gain significant market share in the first quarter of 2020.

McMullian spoke with investment analysts on a May 14 conference call. He said millions of consumers tried Flowers products for the first time during the quarter and e-commerce sales hit new highs.

Flowers Foods shares rose sharply early in trading on May 14 on the New York Stock Exchange, with the stock hitting an intraday high of $ 24.11, up 7%, before falling as and the day progressed.

Flowers Foods, in the first quarter ended April 18, incurred a net loss of $ 5,772,000, compared to net income of $ 65,866,000 a year earlier, or 31 per share on common stock. Net sales were $ 1.4 billion, up 7% from $ 1.3 billion in the same quarter of 2019.

Results in 2020 included a pension plan settlement and a loss reduction of $ 116,207,000. The charge was in line with what had been included by the company in the guidelines published at the end of 2019.

“During the quarter, we transferred the remaining benefit obligations and administrative responsibilities of our largest defined benefit plan to a well-rated insurance company,” said R. Steve Kinsey, CFO and COO . “This was done as part of our retirement risk mitigation strategy, which has helped to significantly reduce our exposure to changes in pension liabilities due to the following interest rates.”

Excluding special items, including costs associated with the termination of the pension plan, Flowers said net income was $ 86.4 million, up 29% from $ 67.2 million. Adjusted earnings per share was 41, up 9 from the first quarter of last year. Flowers said 9 to 10, or at least all of the gain, was attributed to developments associated with the COVID-19 pandemic.

First quarter branded retail sales were $ 891,449,000, up 18% from $ 757,685.00 in the first quarter of 2019. Branded in-store retail sales were almost flat at $ 190,181,000, down less than 1% from $ 191,062,000. Non-retail and other sales were $ 267,814,000, down 15% from $ 315,148,000 a year earlier.

Counting for the overall sales increase of 6.8%, Flowers said total volume was up 0.6% while net price / mix contributed 6.2 percentage points.

The modest decline in store brand sales was attributed to the loss of store brand breakfast bread business with one retailer and lower store brand cake volumes. Sales of in-store branded gluten-free products produced by Canyon Bakehouse were partially offset.

Foodservice and other non-retail sales have declined significantly due to business disruptions experienced by many customers due to the pandemic.

McMullian said quick-service restaurant sales have picked up somewhat in recent weeks.

The shift to retail sales of brands from other categories helped increase margins, material supplies, labor and other production costs equivalent to 49.7% of sales, a decrease of 190 basis points. Improved margins were achieved despite $ 4.1 million in bonuses to “frontline workers” and $ 1.7 million in start-up costs related to the conversion of the company’s bakery plant in Lynchburg , Virginia, at a biological facility.

During the May 14 appeal, McMullian pointed out that Flowers’ hurricane experience has helped guide the company in its response to the pandemic.

“At the height of the buying panic in March, we rationalized our product assortment like we do before a hurricane, but in this case we have done it virtually nationwide,” he said. he declares. “This has allowed us to maximize production by focusing on longer runs of our top selling items. In addition, we were able to reallocate a portion of our foodservice production to support the growth of the retail channel.

Reviewing business during the quarter, McMullian said business was weak in January and closer to normal in February.

“Then at the start of the downturn, we saw an increase in net sales with our 11 week up about 12% as consumers started stocking up on groceries in anticipation of home orders and this performance continued until last week in the quarter, which faced a very strong Easter a year ago. Sales momentum then picked up in the second quarter, with the first three weeks standing at around 7-8% compared to last year. The main driver of sales growth has been our branded retail business, which is growing well above what we would normally expect under normal circumstances, growing 17.7% in the first quarter. “

During the busiest week for the business in March, sales were 70% higher than during the same week in 2019. Growth moderated to around 20% in the last few weeks of the trimester. Overall, Flowers outperformed the bread category by a significant margin, Mr. McMullian said.

“IRI data shows dollar sales of packaged fresh bread in the quarter increased 13%, while sales of Flowers brand bread increased 21.2% in tracked channels,” said he declared. “Our major brands performed particularly well, Tastykake grew 3%, Nature’s Own grew 18%, Wonder grew 30%, Dave’s Killer Bread grew 32% and Canyon Bakehouse grew 77%. As I mentioned earlier, our financial performance during the quarter is mainly due to our ability to respond quickly to market demands. “

Mr McMullian said the company’s response has allowed Flowers to keep retail shelves well stocked in general. The new products helped boost sales, but a bigger factor was Flowers’s DSD system, he said.

“In times of rapidly growing demand like what we saw during the quarter, this advantage becomes even more evident as our PDIs (independent distribution partners) have worked tirelessly to keep the product on the shelves,” he said. he declares. “Not only did this distribution advantage lead to increased sales in the quarter, but we also benefited from a much higher number of consumer trials. “

Recounting that a retailer suggested Flowers attracted 2 million homes to try their brands for the first time during the quarter, McMullian said “uptime” was a major contributor.

“We certainly hope to retain a number of these new consumers and gain longer term benefit from them,” he said.

Pressed by an analyst about the company’s market share gains, McMullian reaffirmed the benefits of the company’s experience with severe weather. He said this background helped even in markets beyond the Southeast.

“I like to joke, ‘They don’t have hurricanes in California, but the guy who runs this area was based in Florida, so he knows how to do that,” he explained. “So even over there in California we have our staff who understand the industry and know how to get the product out quickly. To me, that’s probably the biggest reason our stocks performed during the quarter. “

E-commerce business also grew rapidly in the quarter, with fewer store visits and greater use of online shopping. Mr. McMullian said the company expects this trend of rapid growth from a small base to continue into the future.

“To attract and retain these new digital consumers, we have diverted advertising budgets from traditional media and increased our ecommerce budget,” he said. “The result of the shift in consumer activity and our increased focus on the e-commerce category was a significant increase in bread sales through this channel during the quarter, much of which occurred over the course of the quarter. last six weeks. Nature’s Own fresh bread and rolls online and channel sales increased by 80%. DKB increased by 86% and Wonder by 274%. We believe the benefits of strong brands are even more pronounced in the growing online channel, and we hope to attract many of these new buyers by working to build strong and meaningful relationships with them.

Mr Kinsey said the growth in e-commerce was mainly driven by “click-and-pick”, with home delivery or pickup by consumers in physical stores.

Unlike many, perhaps most consumer packaged food companies, Flowers did not choose to withdraw their profit guidance for the year. It left its sales forecast between $ 4.2 billion and $ 4.3 billion, which equates to growth of 2-4% and adjusted earnings per share of $ 1 to $ 1.08, up from 4 to 13. %.

“In shaping our outlook, we have balanced our outsized first quarter results against potential scenarios that may unfold during the remainder of the year,” said Mr. Kinsey.

He recognized the considerable possibility that sales and profits could end up outside the expected ranges.

McMullian also highlighted considerable uncertainty for the coming months, adding that the company is forecasting a milder bun season, with many consumers saying their Memorial Day vacation travel plans will change.

“How these changes in plans might affect the summer bun season is just one of many factors we’ve taken into account when thinking about our outlook for the rest of the year,” a- he declared. “With business closures and the resulting high unemployment, it’s also likely that we’re already going through a recession. We have a diverse portfolio of products that target different price points. But our margins could be affected if consumers decide to forgo premium brands. “