Flowers Foods (NYSE: NYSE:FLO) has reported robust first-quarter results, bolstered by strategic marketing and innovation efforts. The company experienced growth in retail volumes for the first time since 2020, particularly in its Dave's Killer Bread brand. Despite the volatile economic landscape, Flowers Foods is upholding its financial forecast for the year.
The company plans to enhance its cost structure and anticipates that selling, general, and administrative (SG&A) expenses will remain steady relative to net sales. Growth in the direct store delivery (DSD) network is underway, with the company also signaling openness to merger and acquisition (M&A) opportunities.
Key Takeaways
- Flowers Foods reports first-quarter growth, with Dave's Killer Bread leading in retail volumes.
- The company maintains its financial outlook for the year amid economic uncertainty.
- SG&A expenses are expected to stabilize as a percentage of net sales.
- The DSD network is being optimized for efficiency, with route adjustments and strategic exits from low-margin businesses.
- Gross margin expansion is attributed to pricing, favorable commodity costs, savings initiatives, and operational improvements.
- The company is leveraging digital tools to optimize promotional spending and improve return on investment.
Company Outlook
- Flowers Foods projects gross margin to rise year-over-year, with variances expected each quarter.
- The company is focusing on the away-from-home segment and allocating more resources to it.
- New product launches are planned, following a rigorous evaluation process to meet consumer and financial criteria.
- Profitable business wins and increased cost savings are anticipated to impact the second half of the year positively.
Bearish Highlights
- Ongoing economic uncertainty poses a challenge to the company's stability.
- Promotional lifts have improved but have not yet returned to pre-inflation levels.
Bullish Highlights
- Strategic exits from low-margin businesses have paved the way for higher-margin replacements.
- The Dave's brand continues to outperform the specialty premium category and attract new consumers.
Misses
- Despite overall growth, the company acknowledges early weaknesses in the quarter.
Q&A Highlights
- CEO Ryals McMullian discussed the efficiency of the company's promotional strategies and digital initiatives.
- McMullian confirmed that cost-saving targets have been increased from $30-40 million to $40-50 million.
- New business wins have surpassed expectations, which should help to balance out early quarterly weaknesses and sustain the yearly guidance.
In summary, Flowers Foods is navigating the uncertain economic environment with strategic initiatives aimed at improving efficiency and profitability. The company's commitment to innovation and targeted marketing, coupled with operational improvements and cost-saving measures, positions it to maintain its guidance for the year. As Flowers Foods continues to optimize its DSD network and explore new market segments, investors and industry observers will be watching closely to see how these efforts translate into sustained growth and financial performance.
InvestingPro Insights
Flowers Foods (NYSE: FLO) has recently shown promising signs in its financial performance, with a focus on strategic growth and maintaining a stable dividend. Here are some key insights from InvestingPro that investors may find valuable:
- With a market capitalization of $5.38 billion and a price-to-earnings (P/E) ratio of 20.74 for the last twelve months as of Q4 2023, Flowers Foods is positioned as a company with a significant market presence and a valuation that reflects investors' expectations for its future earnings capacity.
- The company's commitment to returning value to shareholders is evident, as it has raised its dividend for 10 consecutive years and maintained dividend payments for 23 years. The dividend yield as of the latest data stands at 3.61%, which is attractive to income-focused investors.
- Revenue growth has been steady with a 5.93% increase over the last twelve months as of Q4 2023, indicating that the company's strategic initiatives, including the focus on its Dave's Killer Bread brand, are translating into tangible financial results.
InvestingPro Tips for Flowers Foods highlight that net income is expected to grow this year and the company operates with a moderate level of debt, which could be reassuring for investors concerned about financial stability. Additionally, analysts predict that Flowers Foods will be profitable this year, underscoring the company's solid business model.
For those interested in further insights, InvestingPro offers additional tips for Flowers Foods, which can be found at https://www.investing.com/pro/FLO. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of financial data and expert analysis to inform their investment decisions.
Full transcript - Flowers Foods (FLO) Q1 2024:
Operator: Good evening, and thank you for standing by. Welcome to the Flowers Food First Quarter 2024 Results Conference Call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.
J.T. Rieck: Thank you, Carmen, and good evening. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that were all posted earlier on our Investor Relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although, we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ryals McMullian, Chairman and CEO; and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.
Ryals McMullian: Okay. Thanks, J.T, and good evening, everybody. Thanks for joining our first quarter call and we also appreciate everybody's flexibility in accommodating the change in timing for our Q&A session today. Our solid first quarter results reflect the increasing effectiveness of our portfolio strategy, driven by investments in marketing and innovation, our brands gained share despite the challenging consumer environment. Significantly, we also grew branded retail volumes for the first time since 2020. Dave's Killer Bread led the way with its second consecutive quarter of 10% unit growth, but we saw encouraging signs across the brand portfolio, and we continue to expand our margins in our away from home and private label businesses. We are maintaining our financial outlook for the year, which incorporates continued volume improvement, while acknowledging the ongoing economic uncertainty and its potential impact on consumer behavior and the promotional environment. As I mentioned in the prepared remarks, if there's one thing I'd like for you to take away from this call is that we're doing exactly what we said we would do. Although progress is not linear, we'll continue to execute our portfolio strategy with the expectation of achieving our long-term financial targets. And I'm extremely confident in our growth potential and I look forward to continuing our progress throughout 2024. So with that, Carmen, we'll open it up for questions.
Operator: Thank you so much. [Operator Instructions] Our first question and it comes from Stephen Powers from Deutsche Bank. Please proceed.
Stephen Powers: Hey, guys. Good evening. Thanks for the question. I was actually hoping we could talk -- start on just the operating expenses in the quarter and SG&A run rate spending. You called out a couple of things in the prepared remarks, higher labor costs, higher technology costs. You also separately called out stranded overheads. I was wondering if those two things are related or if those are separate? And really what I'm focused on is just how we think about the cadence of that SD that operating expense expenditures over the course of the year? Do we expect some relief on stranded overheads? Do you expect transition costs in California to replace that, just some direction on the cadence of SG&A expenditures over the course of the year would be great? Thank you.
Ryals McMullian: Sure. Happy to do. I'll start, and I'm sure Steve will want to chime in here too. But yeah, it's a little bit of both. Yeah, there's some labor expense in there. There's higher marketing expense in there, which we've talked about before, the rationale for that investment. And you've got the stranded overhead too that we've talked about in the past. The good news is two-fold. One, you may have noticed that we raised our savings range from $30 million to $40 million to $40 million to $50 million, and some of that will help us improve SG&A. As I noted in the prepared remarks, we do recognize our cost structure is a bit too high and we're taking actions to pull some of that back and get more back in line. I mentioned the labor cost and marketing as well play a role in that. So I would expect over time for us to improve, SG&A, particularly as a percentage of net sales, and better leverage our cost structure going forward. Steve, do you want to add to that at all?
Steve Kinsey: Yeah. I mean, I think Ryals hit on it. Obviously, the first quarter is 16 weeks. We did see some elevated costs from that perspective. But we have good visibility to our cost takeout initiatives. And going forward, as a percent of sales, we do expect SG&A to pull back some and then kind of stabilize. So we do feel like we'll be able to get some of that under control as the year progresses.
Ryals McMullian: Yeah. The only other thing I'd add, Steve, relative to the stranded overhead is that, this goes to the -- this actually goes to the volume story as well, is that we are adding new business back at a bit of a faster clip than we originally anticipated at the beginning of the year and of course, that will help cover that stranded cost.
Stephen Powers: Okay. Very good. And then in terms of just use of cash, I noticed obviously the capital expenditure outlook went up, maybe a little bit more detail around what those supply chain investments are targeted at? And then you also sounded a little bit more front-footed with respect to an improved M&A environment. So maybe just some more color there as well.
Ryals McMullian: Yeah. I mean, the capital investments really are just ongoing improvements primarily at the bakeries, increasing automation, updating equipment. It's pretty normal course stuff, Steve, not out of ordinary, but just a little bit more spend than we originally thought at the beginning of the year. And then, yeah, the M&A environment, I am a little bit more bullish on that now. Activity has really starting to pick up, that really started a couple of quarters ago, and has continued so. The conversations that we're having out there with targets are increasing in frequency, which is a good sign. It's been a little slow the last couple of years and you're very familiar with our balance sheet. So we're poised to do a transaction when we find the right one.
Stephen Powers: Okay. Very good. One last thing if I could, just on the ERP pause in the bakeries, I thought that was on track to be lifted in the second half, just don't know if that's still the case or if that's been recalibrated?
Steve Kinsey: Yes. We're still planning to go back to the bakery rollouts starting sometime in the back half.
Stephen Powers: Great. All right. Thanks all. Thank you.
Steve Kinsey: Thank you, Steve.
Operator: Thank you. One moment for our next question. And it comes from the line of Bill Chappell with Truist Securities. Please proceed.
Bill Chappell: Thanks. Good afternoon.
Ryals McMullian: Hey, Bill.
Bill Chappell: Just a -- maybe a little bit more about private label and the branded growth. And just trying to little more color there. I guess if anything -- if there's any real weakness in the economy we hear it at the lower end, obviously, private label has kind of receded over the past few quarters, but I did know, if you're surprised by brands holding up, if it's really Dave's Killer Bread accelerating? I mean, you said it was broader, but 10% growth for Dave's Killer Bread sounds pretty strong. So just maybe you could give us some more color thoughts around beyond Dave's Killer Bread kind of how brands are doing versus private label and kind of how the consumer environment is working out?
Ryals McMullian: Sure. Yeah. I mean, obviously, Dave's has been sort of the star of the show from a volume growth standpoint. But I know you're asking the questions about the broader portfolio. But I will say, just to start, one of the interesting things that we saw in the quarter was low income shoppers coming back to Dave's. So we had mentioned to you all quite a while back that around 20% of Dave shoppers, and we're defining that as 30,000 or less in annual income, 20% of Dave shoppers were low-income shoppers. With the inflationary environment, that dropped off a little bit to about 16% and we've recovered almost back to 20% again. So that tells me that perhaps the consumer is getting a bit healthier. Either that or they're tired of lack of differentiation and cheaper products that are coming back and they said, I see that as a good macro sign that lower-income households are starting to come back. Beyond that, we are seeing some strength in other parts of the portfolio. Wonder is a good example that is a lower price point item for us, but Wonder across sandwich buns and rolls, and loaf has been doing quite well. Nature's Own Perfectly Crafted continues to do well with positive unit growth in the quarter. I think you're the one weak spot that we still have that we've talked about in prior quarters is sort of the broader basic Nature's Own product, whether that's honey (ph) wheat or 100% whole wheat. That is the area of the category that has experienced the most weakness during this era of private label trade down. I think some of that is starting to come back up out of private label into brands like Wonder and if things continue to improve, I'd expect it to continue to come back to brands like Nature's Own as well.
Bill Chappell: Got it. No, that helps. And then a question we haven't really talked about in a long time is just kind of DSD network expansion. But where does that stand? Are you still adding routes, be it in California or elsewhere today? Is it more about velocity and more products through the existing routes? Are you actually shrinking? Are there areas where it doesn't make as much sense as you're trying to be more efficient? Any kind of thoughts on kind of the DSC network as it stands today would be helpful?
Ryals McMullian: Sure. Yeah. It's a little bit of a mixed bag. Now California is its own thing because we're converting the company routes there. But in some areas where we have higher growth, we're adding routes because routes are starting to get full. When that happens, it's usually a quite a nice lift to sales to break up those routes and better service the stores in that area. So in some places, we're adding. In some places on the fringe, we're not. And in other areas, as we move into geographic territories, we're adding routes as well. So it kind of depends on where you are, what the growth trajectory is, how new the territory is? I think the key takeaway is that we are -- what we're really trying to do is make our DSD network as efficient as it possibly can be. So for example, if you're in an area where you've got a lower household penetration, lower market share, and those independent routes may be struggling, we might convert them the company routes for a while, until we get enough sales. In other areas where we're growing, we'll split them up and actually add routes. So it really just kind of depends. The keyword is [indiscernible] that's what we're looking.
Bill Chappell: Got it. Thanks so much.
Ryals McMullian: Thank you.
Operator: Thank you. One moment for our next question, please. And it comes from Jim Salera with Stephens. Please proceed.
Jim Salera: Hi, guys. Good afternoon. Thanks for taking our question.
Ryals McMullian: Yeah, sure.
Jim Salera: I wanted to ask on the volume side, in the prepared remarks, Ryals you mentioned the planned business that's obviously contributed some headwinds on the volume side and absent that total company volume would have been positive. If possible, can you tell us what it would have been like what the actual volume number would have been absent that? And beyond that, is the weakness in the other category primarily coming from some of the restaurant customers because you called out some weakness in fast food. So any color around that would be helpful?
Ryals McMullian: Yeah. Sure. So yeah, we did say, Jim, if you took the intentional strategic exits in, we didn't quantify it. But if you took the intentional strategic exits out, total company volumes would have been positive. The reason we're saying it that way is because we did this on purpose as we talked about. We had low margin business that was never going to be a big contributor and we made the strategic decision to free that capacity up to move into higher-margin business. The good news and I think one of the larger stories of the quarter is that's exactly what we're doing. We're beginning to lap all those strategic exits. So you'll see those continue to go down as we move through the year. We pretty much lap all of them in the third quarter, be very minor strategic exits in the back half and we're replacing that volume with business that meets or exceeds our variable margin targets depending on what category of business we're talking about, whether it's branded or whether it's other. So that's really the key takeaway there.
Jim Salera: Okay. Great. And maybe if I could dig in on Dave's for a second, it continues to grow ahead of the category, which is great, obviously a very differentiated offering. Can you just give us a sense for where it continues to source volume from? And is there other larger branded players? Is it bringing people from outside to the category? Just so we can kind of size up how long it can continue to run ahead of the broader category growth?
Ryals McMullian: Yeah. As we've looked at that it has -- it's taken some share from other players in specialty premium. And it's we look at days against the specialty premium category because we really don't have anything else to compare it to. But it kind of stands apart even from specialty premium because the special premium segment of the category is really, really weak right now. And Dave's is at a price point quite a bit higher than the rest of the specialty premium category. So it's really kind of hard to compare it to that. And it drives the -- it pretty much is the organic brand category. But to answer your question, yes, it brings new people back into the category just because of its quality and differentiation. But Jim, also remember, it's also household penetration. The household penetration from Dave's is roughly half of what Nature's Own does. And so through our marketing investments as we grow geographically, etc., we're growing that household penetration. So that's a big contributor as well.
Jim Salera: Okay. Great. Thanks guys. I'll hop back in the queue.
Ryals McMullian: Thanks.
Operator: Thank you. One moment for our next question. And it's from Mitchell Pinheiro with Sturdivant & Co. Please proceed.
Mitchell Pinheiro: Hey, good afternoon. I mean, I'm curious, you said you elevated the away from home part of the business to the balanced growth as part of your strategy mix and your portfolio mix. And I thought -- I thought that was interesting. But does that -- and that balanced growth means you're going to grow above the category. So what's driving that? I mean, you've exited from some unproductive accounts. Does -- are the accounts that you're in now growing in excess of the category and that's sort of why or is there ability to gain share, but at a strong margin? I'd love to hear your thoughts on that move?
Ryals McMullian: Sure. Well, first of all, I'm glad you noticed that. It's an important point tonight. Yeah. So now that we've freed our capacity up to pursue better business, we felt that it made sense to move it into that category because we're going to place more focus on it now. That does not mean that we're going to over-allocate resources to it to the detriment of the branded business, the strategy remains the same. We're moving to be a consumer-focused brand-oriented company. But when you look at the broader baked foods category, there is tremendous opportunity in away-from-home that we can capture with limited investment. We don't have to do a whole lot in terms of capacity or automation, et cetera to capture some of that volume. And there are opportunities out there and customers who want us to serve them that are willing to deliver much fairer margins than we may have had in the past. So we've always talked about our away-from-home business being an important contributor to the company. And this makes sense because the more profitable that we can make that business, the more resources we're going to have to allocate towards innovation and marketing and all the fun stuff we like to talk to you guys about every quarter. So that's the rationale.
Mitchell Pinheiro: Okay. Thank you. And then you're launching a lot of new products. I thought I read 11 new products and like how do you think about that? Like first of all, in terms of priority of those new products, which ones are going to be at the top? And as these new products obviously would complicate, certainly, in the bakeries as you're -- as you're transitioning, you know to things, is that how do you think about like the new products? Is it going to be positive out of the gate as a margin contributor in addition to sales? And I'd love to hear your comments on that?
Ryals McMullian: Sure. Great question. I mean, we go through a very rigorous process that covers every single one of the points you just made. We start with the consumer, number one. Does the consumer even want this, right? If the answer to that is yes, then we start looking at commercialization and financials and how does this fit operationally? Is it going to create complexity and plans? If so, how much? And we don't launch anything that, does it make sense for the consumer or does it make sense from a financial standpoint or does it make sense from an operational standpoint? We have to check all of those boxes before we'll launch anything. But it's a great question because we go through that entire sort of funneling process, if you will, before we launch any of these new items. Go ahead.
Mitchell Pinheiro: I'm sorry, are these soft launches or are there going to be more substantial rollouts?
Ryals McMullian: Yeah. There are some of them that are more regional, but a lot of times -- because we can make this stuff in so many bakeries Mitch, most of them will be throughout the network.
Mitchell Pinheiro: I hope one more question on gross margin. It was a sizable expansion in the quarter and you talked about pricing contributing, but pricing has been contributing about that rate for the last several quarters. So it seems like, it's more than just that and you called out some other things, but if you had to order them, I mean, I'd love to know which were the largest contributors? And then is it price -- is the mix really helping there at all or not? And then do you see -- I know it's a large long quarter, you generally get some nice -- you get some volume, some leverage there. Does that -- or are we going to see a drop-off in gross margin in the second quarter?
Steve Kinsey: Yeah, Mitch, this is Steve. I mean, obviously, we've had to -- we've taken considerable pricing to help mitigate some of the inflationary pressure. So that continues to really help from a top line and gross margin perspective. And the mix, talking about Dave's and the growth there, we continue to see really nice contribution overall from price mix. So I would say that -- I'd read that number one. And then obviously, we had some nice commodity tailwinds coming into the year and those continue primarily through the first half, some into the third quarter and they start to rain some in Q3 and Q4. So that would be the second, I'd say primary driver outside of the top line from an overall gross margin perspective.
Ryals McMullian: Mitch, also as we talk about the savings initiatives, some of those are going to benefit gross margin, not just SG&A, but gross margin as well. And we also pointed to -- in the quarter, we had a couple of discrete operational issues that we were working on that definitely impacted gross margin, that if we had hit closer to plan, we would have outperformed even the number we turned out on the bottom line. So as we get those things away, it's just two bakeries, it's not the end of the world, but it did have a bit of an impact on the quarter. As we bring that more back in line, that's also going to benefit gross margin. It will benefit the whole P&L with particularly gross margin.
Steve Kinsey: I mean, the forecasted expectation is to increase gross margin year-over-year, but obviously, we're expecting up gross margin quarter-by-quarter just different magnitudes.
Mitchell Pinheiro: Okay. All right. That's all from me. Thank you.
Operator: Thank you. [Operator Instructions] And it comes from the line of Connor Rattigan with Consumer Edge. Please proceed.
Connor Rattigan: Good afternoon. Thanks for taking our questions.
Ryals McMullian: Hey, Connor
Connor Rattigan: Hey. So in the prepared remarks, Ryals, you noted that you guys remain well below pre-pandemic promo levels and that it doesn't really seem like there's a real big notable lift on promo, but it does sound like your digital initiatives are really impacting your promo strategy. So I guess what learnings have you guys leaned so far on the promo front from those initiatives? And also, if you're not seeing as strong of a lift as you would -- as you would like, should we maybe interpret that, that may inform your -- I guess your spending decisions as you kind of debate the balance between using more promo versus marketing spend?
Ryals McMullian: Absolutely. And I will say, it seems like the lifts have gotten a little bit better, but certainly not where we were pre-inflationary period, let's say. We did promote a little bit more in the quarter, pretty targeted in what we did, and -- but we're spending a whole lot less trade spend in order to do it. And the digital tools that you mentioned are really helping us achieve that. We get better insights, we get better sort of post-mortems if you will on promotions. So that when we do them, we're generally doing them with a good positive return. So it's been tremendously helpful because I mean, you can see how much our trade spend has come down over the last three or four years and a lot of that has been enabled by these digital tools we have now via TPM.
Connor Rattigan: Got it. Very helpful. And then just one quick follow-up for me. So you guys also called out the expectation for profitable business wins and increased cost savings initiatives to flow through in the second half. Is this a change from any prior expectations or was there may be some sort of a shift of expected cost savings out of 1Q into the back half or just no change there?
Ryals McMullian: So no, we were able to identify -- when we came out of the year, we had a -- we publicly remarked that we had a target of $30 million to $40 million. And as we really got into that, we uncovered further opportunities and we've been able to raise that pretty confidently actually to $40 million to $50 million. And we're already enjoying some of those savings now. And in the prepared remarks, I'll listed out a few categories where we were looking to bring our costs back in line.
Connor Rattigan: Got it. Thanks so much.
Ryals McMullian: Yeab, sorry. The new business, Connor. Let me touch on that too. So again, summer label, when we started out the year. We had expectations for certain new business wins that we had really good line of sight to. And as we move through the year and continue -- move through the quarter rather and continue to work on refilling this strategically exiting capacity, we ended up finding more than we thought we were going to and so our expectations for that have increased somewhat. Nobody has asked us yet sort of about how the cadence of the quarter went. This is a good time as any to address it. The quarter did start off a little weaker than we anticipated that it would. I know originally we had kind of signaled a first half weighted cadence to the year. And that sort of unexpected weakness early in the quarter got us a little off cadence. However, now that we have these increased savings targets and we have line of sight to hire new business wins, and we think that that's going to be able to offset that early weakness, thus maintaining guidance for the year. So that's how all that sort of shook out.
Operator: Thank you. And as I see no further questions in the queue, I will hand it back to Ryals McMullian for final remarks.
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