Flowers Food has a strategy to grow revenue through acquisitions, expansion, new geographic markets, new products, and new business. This strategy achieved revenue growth in Q1. Flowers Foods was challenged by higher input costs, volume shifts in some direct store delivery (DSD) product categories, and pricing issues in some of its warehouse segment business. The increase in price in the DSD products that it made last fall offset some of the higher input costs.
In Flowers Foods' DSD business, the Nature’s Own and Tastykake brands showed strong performance. Sales of Nature’s Own soft variety breads increased 3% in units and 7.7% in dollars. The brand fills the consumer's need for whole grains, added fiber content, and reduced calories. Soft variety is the largest segment in dollars for the United States, and Nature's Own is the number one brand in that segment. White bread demand is declining slightly and Flowers Food's white bread sales are declining, although its premium white bread has greater elasticity. Other segments, such as branded buns and rolls and specialty breads remain under pressure. Flowers Foods saw increase in private label sales due to new agreements with some private label customers.
The integration of theTastykake acquisition is on track and will be completed this summer. The sales and earnings of Tastykake are in line with the company's expectations. Tastykake has already become Flowers Foods' second biggest brand and is gaining shelf space and consumer acceptance in the company's core markets in the southeast and Texas. While the cake market is not up, Flowers Foods is seeing growth in that segment due to the Tastykake acquisition.
Flowers Foods is expanding its DSD segment into new markets with high population that are adjacent to its existing territories. For instance, it has expanded into the Pennsylvania area. To facilitate this expansion, Flowers Foods expanded its Oxford, Pennsylvania bakery to add bread and bun capacity. It introduced Nature’s Own and other Flowers bread products in Philadelphia, which adds 3 million more potential consumers.
In the warehouse segment, Flowers Foods had increases in volume through new business. Margins are still under pressure, but the company has increased prices to offset higher commodity costs. However, this is not enough to return to normal margins.
In the food service segment, Flowers Foods' growth increased by 4.75%, with new business as the driver of growth. It is also growing its food service business with existing customers, especially in the DSD expansion markets. The growth was from new business, not from the category improving.
Flowers Foods is the number two baking company in the United States. The baked goods marketplace is still challenging and there is a lot of promotional activity. Buns and rolls are always heavily promoted. There has been no change in cake promotions. Flowers Foods does not expect pressure from retailers to lower prices because retailers understand that fresh bakery is one of the top sales categories.
The baking industry is consolidating and Flowers Foods believes it is in great shape to take advantage of the consolidation. Some capacity is coming out of the industry, but it was probably inefficient capacity. A lot of companies, including Flowers Foods, have been adding more automated and efficient machines.
Flowers Foods did not reference the IRI data this quarter because IRI had some problems with its database. The IRI data represents only 48 percent of Flowers Foods' sales.
Evaluation of markets
Flowers Food is continuing to see higher sales at the beginning of the month, but by the time the consumer gets to the end of the month, their cash is running out. The consumer is being cautious and not making impulse purchases, There is no pantry buying.
The retailers that target the upper end customer are doing well.
Financials
Flowers Food had 12 percent sales growth for Q1. The core business posted a 4.1% sales growth, of which 2.4% was price mix. The Tasty acquisition contributed 7.9 % to the revenue growth. Absent the acquisition, growth in the DSD segment was 4.2%, which was driven by Nature's Own, store brand, and non-retail growth. The non-retail growth was from existing and new fast food customers. Sales in the warehouse group increased 3.8% and volume increased 4 %.
Earnings per share on a GAAP basis was $.28/shares, a decline 7%. On an adjusted basis, earnings per share declined $0.05, roughly 15.2%. Tastykake contributed approximately $0.01 to the quarter earnings. High input costs were the cause of the decline, as well as the inability to fully price products to protect margins. Gross margins declined 200 basis points due to higher input costs and are at almost historical lowers for the company. Tasty added 10 basis points to gross margin. Flowers Foods expects earnings per shares for fiscal year 2012 to increase by 3.8% to 8%. It has adjusted this number down to reflect increased interest expense.
Flowers Foods completed a $400 million bond offering yielding 4.375%, the proceeds of which will be used for future acquisitions, general corporate purposes, and working capital. At the end of Q1, Flowers Food had $497 million in debt, which is 1.8 times trailing 12-month EBITDA. Because it had $186 million of cash on hand, its net debt was approximately $311 million. It estimates interest expense for fiscal year 2012 to be approximately $21 million, which should be partially offset by approximately $13 million in interest income.
Cash flow was negatively impacted by lower net income and pension contributions of approximately $12 million. During Q1, Flowers Foods also spent 14 million in capital expenditures and paid dividends of approximately 20 million. It repurchased approximately 70,000 shares for 1.4 million and it has approximately 7.1 million shares available for repurchase under its stock repurchase plan.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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