Flowers Foods upbeat despite intensifying inflation

THOMASVILLE, GA. — After enduring a “year of unique challenges,” Flowers Foods, Inc. is poised for solid top-line growth in 2022 together with flat to moderately growing earnings, the company said while announcing results for 2021. Inflationary pressures are expected to intensify in the new year.

Flowers Foods net income in the year ended Jan. 1 was $206.2 million, equal to 97¢ per share on the common stock, up 35% from $152.3 million, or 72¢ per share, in 2020. Net sales were $4.33 billion, down 1.3% from $4.39 billion the year before. Flowers said adjusted net income was down 5% for the year. Adjusted EBITDA was down 6%. The company’s EBITDA margins were 11.3%, down 60 basis points from a year earlier.

In the fourth quarter, Flowers earnings were $39.3 million, or 18¢ per share, down 30% from $55.8 million, or 26¢. Net sales were $983.5 million, down 3.9% from $1.02 billion.

In the fourth quarter, the 3.9% drop mostly was because of a 53rd week in the prior year, which shaved 7.7% of sales. Pricing and mix were a positive 6.2% contributor to sales while volume was down 2.4%.

Branded retail sales at Flowers in 2021 were $2.88 billion, down 1.3% from a year earlier. Store brand sales fell 12%, to $535 million. Non-retail and other sales were $921 million, down up 6.3%.

In the fourth quarter, branded retail sales were $650 million, down 4% from a year earlier. Store branded retail sales were $117 million, down 15% and non-retail and other sales were $217 million, up 4%.

In a call pre-recorded Feb. 11 for investment analysts, R. Steven Kinsey, chief financial officer and chief administrative officer, emphasizing that the biggest reason sales were down in the fourth quarter was because of the extra week a year earlier. The difference obscured numerous positives in the company’s results.

“Despite the difficult prior year comparisons, Flowers fresh packaged bread gained 10 basis points of market share in tracked channels,” he said. “Excluding the extra week in the prior-year period, sales of Nature’s Own increased 4%, and Dave’s Killer Bread and Canyon Bakehouse each rose 15%.”

A. Ryals McMullian, president and chief executive officer, also identified positive sales trends.

“Our household penetration grew significantly over the last two years,” he said. “Importantly, we’ve held onto many of those new customers and further increased penetration of our leading brands in 2021. Since 2019, our household penetration has increased 300 basis points, with Nature’s Own up 460 basis points, Dave’s Killer Bread up 350 basis points and Canyon Bakehouse up 70 basis points. And consumers are also increasing the number of times they buy our products, with repeat rates up 270 basis points since 2019. These improved metrics are driving sales and market share gains.”

Mr. McMullian also highlighted progress the company had made around numerous initiatives, including the company’s digital transformation and new product introductions. In the latter category, was the recent introduction of snack bars under the Dave’s Killer Bread brand.

“The bars, which come in three flavors, offer the same killer taste, texture and nutrition that DKB fans have come to love with the ease of a grab-and-go product,” Mr. McMullian said.

For the full year of 2022, Flower said sales would range from $4.66 billion to $4.695 billion, up 7.6% to 8.4% from 2020. Adjusted earnings per share were forecast by the company at $1.25 to $1.35, versus $1.24 in adjusted diluted earnings per share in 2021.

Mr. McMullian Flowers has been successful in securing higher prices in response to inflation adding that the moves do not appear to have cost the company business.

“So far, we’ve not seen a meaningful reduction in demand due to our two price increases, and we’re hearing similar commentary from other companies in the consumer goods space,” he said. “The early indications this year are that units are holding up well and our trade promotion rate remains low. I have seen some research that suggests consumers are beginning to look for value as prices rise, but so far, that dynamic has been less apparent in the bread category. In fact, most of the category softness has been confined to lower-priced, less-differentiated products. Premium items such as Nature’s Own Perfectly Crafted, Dave’s Killer Bread and Canyon continue to generate growth in dollars and units. That product mix gives us confidence that 2022 has the potential to be another very strong year. However, if consumers begin to trade down to lower-priced products, that could put some temporary pressure on margins until the current inflationary environment subsides.”

Actions the company is taking to enhance profitability will yield more benefits in the second half of 2022 than in the first, Mr. Kinsey said.

“While our January pricing initiatives will impact the full year, the benefits of many of our growth and efficiency initiatives are expected to occur in the back half of 2022,” he said. “Some of the factors we considered when setting guidance — including inflationary pressures, our ability to take additional pricing and the resulting demand elasticity. Variations among these factors could drive our actual results to the top and bottom of the ranges provided.”

A degree of uncertainty always surrounds financial guidance early in a year, but Mr. McMullian elaborated on specific factors he said could drive where results fall within the range provided by the company.

“The first is demand elasticity, and the second is the timing of our efficiency initiatives,” he said. “As we said, our early analysis suggests that consumers are absorbing the price increases well, but we will need to get a little bit further into the year for a more complete picture. Also, given the success of our portfolio optimization initiative, which generated $60 million in savings over the last two years, I am confident in our ability to deliver incremental value. However, a timing shift in those initiatives could impact overall results this year. So consumer trade-down to lower-priced products and a timing shift in our savings initiatives could move results toward the lower end of the range, but strong continued demand for our premium brands and timely delivery of savings would help drive results toward the upper end of the range.”

Mr. Kinsey said inflation is higher in 2022 than in 2021, in part because several hedges established in 2021 before cost hikes have ended.

“In total, we are expecting high single-digit cost increases (in 2022),” he said. “Prices for commodities such as flour, fats and oils; and packaging have risen significantly. And we are doing everything in our power to offset these higher costs. Our hedging strategy, in which we attempt to lock in commodity prices 6 to 12 months out, provides visibility into future inflation. Approximately 70% of our key raw materials are covered for 2022.”

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