Flowers Foods announced results for the 12-week third quarter of 2013 with sales increased 22.5 percent to $878.5 million compared to $717.3 million in last year's third quarter. Including acquisition-related costs of $0.02 per diluted share, diluted earnings per share (EPS) was $0.16. Excluding acquisition-related costs, diluted EPS rose 5.9 percent to $0.18 over last year's third quarter. Strong performance in the company's direct-store-delivery (DSD) segment was offset by higher marketing expense, margin pressure in the warehouse segment, and added infrastructure to support sales growth.
Volume increased 20.1 percent with acquisitions contributing 3.6 percent, and net price/mix was unfavorable at 1.2 percent. Gross margin (excluding depreciation and amortization) of 46.7 percent was flat compared to the third quarter of fiscal 2012. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, excluding the acquisition-related costs, was 10.3 percent for the quarter. Earnings before interest and taxes (EBIT) as a percent of sales was 6.9 percent, excluding acquisition-related costs. DSD segment (83 percent of sales) operating margin was 8.7 percent of sales, impacted 70 basis points by carrying costs of acquired Hostess assets. Warehouse segment (17 percent of sales) operating margin was 4.8 percent of sales, impacted by margin pressure on certain frozen foodservice business.
The company completed the acquisition of 20 closed bakeries; the Wonder, Merita, Home Pride, Butternut, and Nature's Pride brands; and 36 depots from Old HB, Inc. (formerly Hostess Brands) for $355.0 million. Reintroduction of Wonder, Merita, Home Pride and Butternut brands across Flowers' DSD territory began in late September and will continue throughout 2014.
Third Quarter 2013 Results
For the 12-week third quarter of 2013, sales increased 22.5 percent to $878.5 million compared to $717.3 million in last year's third quarter. This increase was attributable to increased volume of 20.1 percent and contributions from the Sara Lee/California acquisition of 3.6 percent, partially offset by unfavorable net price/mix of 1.2 percent. The company cycled the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls and single-serve cake categories primarily drove volume increases in the branded retail channel. Volume increases in the store brand channel were driven by increases in the white bread, buns and rolls and variety bread categories. The non-retail channel volume increases were primarily in the foodservice, vending and restaurant categories. The unfavorable net price/mix was driven primarily by a mix shift in the cake business to more single-serve snack cakes and negative price/mix in the foodservice category.
Net income for the quarter was $33.9 million, or $0.16 per diluted share. Excluding acquisition-related costs in both years, net income for the quarter was $38.4 million, or $0.18 per diluted share compared to $35.2 million, or $0.17 per diluted share in the third quarter of fiscal 2012. During the third quarter this year, the company incurred acquisition-related costs of $4.5 million, net of tax, or $0.02 per diluted share. During the third quarter of last year, the company incurred acquisition-related costs of $4.0 million, net of tax, or $.02 per diluted share. Including these items, net income was $31.2 million, or $0.15 per diluted share.
Gross margin (excluding depreciation and amortization) as a percent of sales was 46.7 percent, or flat compared to the third quarter of 2012. Increased outside purchases as a percent of sales, decreased manufacturing efficiencies, and carrying costs related to the acquired Hostess assets were offset by higher sales volumes and decreased ingredient and workforce-related costs as a percent of sales. Although ingredient costs as a percent of sales decreased, prices for ingredients rose.
Selling, distribution and administrative (SD&A) costs as a percent of sales for the quarter were 37.3 percent, up 140 basis points from 35.9 percent of sales in the third quarter of fiscal 2012. Acquisition-related costs negatively impacted SD&A costs by $7.0 million, or 80 basis points as a percent of sales in the third quarter of 2013. In last year's third quarter, acquisition-related costs negatively impacted SD&A by $5.1 million, or 70 basis points as a percent of sales. Increased workforce-related costs and marketing costs were the main drivers of the increase 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 third quarter. Net interest expense decreased slightly in this year's third quarter compared to last year's third quarter primarily because of increased interest income associated with an increase in distributor notes receivable outstanding. The effective tax rate for the quarter was 32.4 percent compared to 36.4 percent in last year's third quarter, due primarily to a discrete benefit recorded by the company. The full-year tax rate is expected to be approximately 35.5 percent to 36.0 percent, excluding the effect of discrete items and the bargain purchase accounting gain recorded in the first quarter this year.
