Flowers Foods, Inc. Reports Sales Decline In Fourth Quarter

Flowers Foods, Inc. reported results for its fourth quarter and fiscal year ended January 1, 2011 and refined guidance for 2011. In summary, Flowers Foods:  

  • Delivered net income of 5.5 percent of sales for the quarter and 5.3 percent of sales for the year.
  • Achieved its ninth consecutive year of growth in earnings per share from continuing operations.
  • Reported diluted earnings per share of $.34 for the quarter, an increase of 3.0 percent, and $1.49 for fiscal 2010, an increase of 5.7 percent (7.2 percent excluding a $.02 gain on acquisition recorded last year).
  • Reported fourth quarter sales decrease of 0.6 percent and full year sales decrease of 1.0 percent. Excluding the impact of the deconsolidation of a variable interest entity (VIE), sales for the fourth quarter and fiscal year would have been up 0.1 percent and down 0.5 percent, respectively.
  • Confirmed fiscal 2011 sales guidance 3 percent to 6 percent growth and updated earnings per share guidance to 5 percent to 10 percent growth (previous guidance was for earnings per share growth of 8 percent to 13 percent).

George E. Deese, Flowers Foods' chairman and chief executive officer, said in a prepared statement, "Flowers Foods delivered solid earnings growth for the quarter and the year and we again achieved record earnings per share for the year.  Even so, we did not meet our plan for sales and earnings. Our sales volume was lower than expected in the fourth quarter as we initiated pricing action and reduced promotions in the face of commodity headwinds. The weak economy and high unemployment continue to pressure the market and impact consumer buying patterns.

"In 2010, we made Flowers Foods an even stronger company by investing in highly efficient production capacity, innovative new products, and new geographic markets—all of which position the company for further growth. Looking forward, we will continue to leverage our long history of taking care of customers' needs, outperforming in the marketplace, proven growth strategies, and financial discipline to create value for shareholders.  Our focus has been -- and will remain -- on the long-term."

Fourth quarter sales decreased 0.6 percent to $573.1 million from the $576.8 million reported for last year's fourth quarter. The sales decrease of 0.6 percent was attributable to volume declines of 2.2 percent and 0.7 percent resulting from the deconsolidation of a variable interest entity (VIE). Partially offsetting these declines was an increase in pricing/mix of 2.0 percent and a 0.3 percent contribution from acquisitions.  The volume declines were primarily related to declines in the branded retail channel, particularly in the white brand, breakfast bread, and cake categories, which were partially offset by increases in the sandwich round category. These volume declines were partially offset by increases in the store-brand retail channel, primarily in the snack cake category. Although the company initiated significant pricing actions during the quarter, the fresh baked foods category remained very competitive.

During the quarter, the company's direct store delivery (DSD) sales decreased 2.6 percent, reflecting volume declines of 3.9 percent and a 0.8 percent decline resulting from the deconsolidation of a VIE. Positive pricing/mix of 2.1 percent partially offset these decreases. The volume decline was primarily due to decreases in the branded retail channel, particularly in the white bread and breakfast bread categories.

Sales through warehouse delivery increased 7.9 percent, reflecting positive pricing and mix of 4.6 percent, positive volume of 1.9 percent and a 1.4 percent contribution from an acquisition. Decreases in branded retail sales as a result of a shift in snack cake sales to store-branded retail were more than offset by increases in the store-brand retail, foodservice, and contract manufacturing channels.

Net income for the quarter was up 2.6 percent to $31.4 million from $30.6 million in the fourth quarter of fiscal 2009. For the quarter, diluted earnings per share were $.34, up slightly from $.33 in last year's fourth quarter.

Gross margin as a percentage of sales for the quarter was 48.1 percent, up 100 basis points as compared to 47.1 percent in the fourth quarter of 2009. This increase was due primarily to decreased ingredient costs as a percent of sales. The decrease in ingredient costs was partially offset by increased workforce-related and packaging costs as a percent of sales.

Selling, distribution, and administrative costs as a percentage of sales for the quarter were 36.7 percent compared to 35.6 percent in the same quarter last year. This increase was primarily the result of increased workforce-related costs as a percent of sales.

Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's fourth quarter. Net interest income for the quarter was approximately $600,000 higher than last year's fourth quarter due to less borrowings outstanding. The effective tax rate for the quarter was 33.3 percent as compared to 33.6 percent last year.

Operating margin as a percent of sales for the quarter was 8.0 percent compared to 8.2 percent in last year's fourth quarter. EBITDA as a percent of sales for the fourth quarter was 11.4 percent, compared to 11.5 percent for the fourth quarter of 2009.

During the quarter, the company invested $24.2 million in capital improvements and paid dividends of $18.2 million to shareholders. The company also acquired 639,300 shares of its common stock under its share repurchase plan for $16.4 million, an average of $25.69 per share.

Sales for fiscal 2010 decreased 1.0 percent to $2.57 billion from the $2.60 billion reported for fiscal 2009. This 1.0 percent decrease consisted of negative pricing/mix of 1.7 percent and 0.5 percent due to the deconsolidation of the VIE. Partially offsetting these decreases were 1.0 percent contribution from acquisitions and increased volume of 0.2 percent. The increase in volume was primarily driven by soft variety bread and sandwich rounds in the branded retail channel and the cake category in the store-brand retail channel. These increases were partially offset by decreased sales in branded white bread and the vending and fast food categories of the foodservice channel. Throughout the year, the company experienced significant pricing pressure and substantial promotional activity within the baking industry.

For the year, the company's DSD sales decreased 3.0 percent. This decrease consisted of negative pricing/mix of 2.0 percent, lower volume of 0.4 percent and a 0.6 percent decline resulting from the deconsolidation of the VIE. The DSD segment experienced increases in branded soft variety and branded sandwich rounds, which were more than offset by decreases in branded white bread, store-brand white and variety breads, fast food, and foodservice.

During fiscal 2010, sales through warehouse delivery increased 7.9 percent, reflecting a 5.8 percent contribution from acquisitions, volume increases of 1.2 percent, and positive pricing and mix of 0.9 percent. The volume growth was the result of increases in snack cake, contract manufacturing, and foodservice businesses, partially offset by decreases in the vending category.

Net income for the year increased 5.2 percent to $137.0 million from $130.3 million for fiscal 2009. Diluted earnings per share were $1.49 for fiscal 2010, up 5.7 percent from the $1.41 reported for fiscal 2009.  Last year's results included a gain on acquisition of $.02 per diluted share relating to a May 2009 acquisition.

Gross margin as a percentage of sales for the full year was 47.7 percent compared to 46.5 percent in the prior year. The increase in margin was the result of decreased ingredient costs as a percent of sales, partially offset by increases in workforce-related and packaging costs as a percent of sales, and start-up costs associated with new production lines at several of our bakeries.

For the year, selling, distribution, and administrative costs as a percentage of sales were 36.4 percent compared to 35.6 percent in the prior year. The increase as a percent of sales was due primarily to higher workforce-related and advertising costs as a percent of sales, partially offset by lower bad debt costs as a percent of sales.

Depreciation and amortization expenses for fiscal 2010 remained relatively stable as a percent of sales compared to prior year. Net interest income for the year was $3.1 million higher than prior year due to lower interest expense as a result of less debt outstanding. The effective tax rate for the year was 34.9 percent, compared to 35.6 percent last year. This decrease was the result of favorable discrete items recognized during the year.

Operating margin as a percent of sales for the year was 8.0 percent, up slightly from 7.9 percent of sales last year. EBITDA for the year as a percent of sales increased to 11.3 percent from 11.0 percent for fiscal 2009.

For the year, the company invested $98.4 million in capital improvements and paid dividends of $70.9 million to shareholders. During the year, the company acquired 1,548,771 shares of its common stock under its share repurchase plan for $39.2 million, an average of $25.30 per share. Since the inception of the share repurchase plan, the company has acquired 24.2 million shares of its common stock for $404.2 million, an average of $16.70 per share. The plan authorizes the company to repurchase up to 30.0 million shares of common stock.

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