Flowers Foods, Inc., which owns Mrs. Freshley’s, reported results for its 12 and 28 weeks ended July 14, 2012. Sales were $681,561,000 compared with $642,596,000 for the second quarter of 2011. Net income was $28,380,000, or $0.21 per share-diluted, compared with $28,210,000, or $0.21 per share-diluted, in last year’s second quarter.
Adjusted for one-time acquisition-related costs, earnings per share were $0.22 for the quarter compared to adjusted earnings per share of $0.23 reported for last year’s second quarter.
George E. Deese, Flowers Foods’ chairman and chief executive officer, said in a prepared statement, “We are pleased to deliver sales growth in the second quarter in the face of heightened promotional activity and a highly competitive marketplace. Last year’s Tasty acquisition and the continued growth of our Nature’s Own and Tastykake brands drove our sales up 6.1 percent compared to last year. Even so, ongoing pressure on consumers has affected our industry much as it has other food categories, and softer volumes in the fresh breads, buns, and rolls category is driving more competitive activity in the near-term. Our team continues to work on improving efficiencies and cost controls in the face of high input cost inflation, and we achieved higher operating income in the quarter.
“The acquisition of Lepage Bakeries (completed July 21, 2012) brings us additional market presence in the Northeast, sales of about $170 million, and robust operating margins, which will strengthen our business. The opportunities presented by the Lepage acquisition, last year’s Tasty Baking acquisition, and further industry consolidation, strengthen my confidence in our team’s ability to achieve our long-term growth objectives for 5 percent to 10 percent annual sales growth, double-digit earnings growth, and reaching 75 percent of the U.S. population with our direct-store-delivery segment by 2016.”
For the 12-week second quarter of 2012, sales were $681.6 million, a 6.1 percent increase from the $642.6 million in last year’s second quarter. This increase was attributable to favorable net price/mix of 2.3 percent, contributions from the Tasty acquisition (acquired May 20, 2011) of 4.5 percent, partially offset by volume declines of 0.7 percent. Dollar sales increased across all channels, while volume decreases in the branded retail channel led to the overall volume decline.
Lower volume in the white bread and buns and rolls categories was the primary driver in the branded retail volume decline. These declines in branded retail were partially offset by increased volumes in branded soft variety.
Volume increases in the foodservice channel partially offset the decreased volume in branded retail. Net income for the quarter was $28.4 million compared to $28.2 million in the second quarter of fiscal 2011. For the quarter, diluted earnings per share were $0.21, flat as compared to $0.21 in last year’s second quarter.
During the second quarter this year, we incurred one-time acquisition-related costs of $1.4 million, net of tax, or $0.01 per diluted share and, in last year’s second quarter, we incurred one-time costs related to the Tasty acquisition of $3.2 million, net of tax, or $0.02 per diluted share.
Gross margin as a percentage of sales for the quarter was 46.3 percent, down 50 basis points from 46.8 percent in the second quarter of 2011. This decrease was due primarily to increased ingredient and packaging costs as a percent of sales. The increase in ingredient costs was primarily attributable to flour and sweeteners. The increase in ingredient and packaging costs was partially offset by price increases, lower energy costs as a percent of sales and improved manufacturing efficiencies.
Selling, distribution, and administrative costs as a percent of sales for the quarter were 36.1 percent, down 70 basis points from 36.8 percent of sales in the second quarter of fiscal 2011. Lower workforce-related costs as a percent of sales and decreased acquisition-related costs were the main drivers of the decrease. One-time acquisition-related costs were $2.3 million, or 30 basis points as a percent of sales during the second quarter this year and $4.5 million, or 70 basis points as a percent of sales in last year’s second quarter.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year’s second quarter. The company incurred net interest expense during the quarter due to the issuance of $400.0 million of senior notes in advance of the Lepage transaction resulting in a negative impact of approximately $0.02 per diluted share to second quarter results. The effective tax rate for the quarter was 36.2 percent as compared to 35.5 percent in last year’s second quarter. This increase was primarily due to certain temporary differences that reduced the Section 199 deduction, and the expiration of certain tax benefits.
Operating income, defined as earnings before interest and taxes (EBIT), for the second quarter was $47.4 million, or 7.0 percent of sales as compared to $43.1 million, or 6.7 percent of sales in last year’s second quarter.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second quarter was $69.7 million, or 10.2 percent of sales compared to $64.0 million, or 10.0 percent of sales for the second quarter of 2011.
One-time acquisition-related costs negatively affected EBIT and EBITDA by $2.3 million, or 30 basis points as a percent of sales in this year’s second quarter and by $4.5 million, or 70 basis points as a percent of sales in last year’s second quarter.
During the quarter, the company’s direct store delivery (DSD) sales increased 7.6 percent, reflecting positive net price/mix of 1.5 percent, contribution from the Tasty acquisition (until cycled) of 5.5 percent and volume increases of 0.6 percent. Dollar sales increased across all channels. The volume increases were primarily due to increases in the store brand, primarily buns and rolls, and non-retail channels, primarily foodservice, partially offset by decreased volume in the branded retail channel.
Decreases in branded retail volume were primarily driven by declines in the white bread and buns and rolls categories, partially offset by volume increases in the soft variety and cake categories.
Operating income for the DSD segment was $51.6 million, or 9.1 percent of sales for the second quarter compared to $51.3 million, or 9.8 percent of sales in last year’s second quarter. This modest increase was attributable to higher sales, partially offset by increases in input costs, primarily flour.
Sales through warehouse delivery decreased 0.7 percent, reflecting volume decreases of 4.5 percent, partially offset by positive net price/mix of 3.8 percent. The volume decrease was primarily attributable to decreases in store brand cake and contract manufacturing in the non-retail channel, partially offset by volume increases in foodservice. Store brand cake and contract manufacturing showed positive net price/mix.
Operating income for the warehouse segment was $6.3 million, or 5.4 percent of sales for the second quarter compared to $5.1 million, or 4.3 percent of sales in last year’s second quarter. Higher ingredient, packaging, and distribution costs were more than offset by lower energy costs and improved manufacturing efficiencies.4
During the second quarter, cash flow from operating activities was $66.7 million. The company invested $14.9 million in capital improvements and paid dividends of $21.8 million to shareholders. The company did not acquire any of its common stock under its share repurchase plan during the second quarter. Since the inception of the plan, the company has acquired 37.9 million shares for $432.2 million, an average of $11.41 per share.
Including Lepage, the company expects 2012 sales to increase 7.0 percent to 9.0 percent over 2011 with Lepage accounting for approximately 2.5 percent of the increase. Including Lepage, earnings per share are now forecast to increase 3.5 percent to 8.0 percent, excluding one-time costs, over the 2011 adjusted earnings per share of $0.96. Lepage is expected to be accretive approximately $0.02 to $0.04 in the second half, net of financing costs. Excluding Lepage, Flowers’ earnings per share are now expected to be flat to slightly up. The guidance takes into consideration the heightened marketplace competitiveness and overall challenging business environment. Capital expenditures for 2012 are expected to be $75.0 million to $85.0