Earnings call transcript: Flowers Foods Q2 2025 reports mixed results

Flowers Foods Inc. (FLO) reported its second-quarter 2025 earnings, meeting analysts’ expectations on earnings per share (EPS) but missing revenue forecasts. The company posted an EPS of $0.30, aligning with projections, while revenue came in at $1.24 billion, below the anticipated $1.27 billion. Following the announcement, Flowers Foods’ stock fell 3.2% in pre-market trading. The $3.5 billion market cap company maintains a solid financial foundation, with InvestingPro analysis showing a "GOOD" overall financial health score. According to InvestingPro’s Fair Value analysis, the stock currently appears undervalued, presenting a potential opportunity for value investors.

Key Takeaways

• Flowers Foods met EPS expectations but missed revenue forecasts.
• Stock dropped 3.2% in pre-market trading after earnings release.
• Net sales increased by 1.5% year-over-year, aided by the Simple Mills acquisition.
• Gross margin decreased by 110 basis points to 48.8%.
• The company continues to focus on product innovation and cost savings.

Company Performance

Flowers Foods reported a modest increase in net sales by 1.5% compared to the previous year, driven significantly by the acquisition of Simple Mills, which contributed 5.1% to sales. Despite this, the company faced challenges, with a decline in price mix and volume by 1.2% and 2.4%, respectively. The gross margin fell by 110 basis points to 48.8%, reflecting increased cost pressures. Notable strengths include the company’s impressive dividend track record, having maintained payments for 24 consecutive years with an attractive current yield of 5.97%. InvestingPro subscribers have access to 8 additional key insights about FLO’s financial health and growth prospects through exclusive ProTips.

Financial Highlights

• Revenue: $1.24 billion, a 1.5% increase year-over-year
• Earnings per share: $0.30, a decrease of $0.06 from the previous year
• Gross margin: 48.8%, down 110 basis points
• Net debt to adjusted EBITDA: 3.2x

Earnings vs. Forecast

Flowers Foods achieved an EPS of $0.30, in line with forecasts, but missed revenue expectations, reporting $1.24 billion against a forecast of $1.27 billion. The revenue shortfall represents a 2.36% miss, indicating challenges in market conditions or execution.

Market Reaction

Following the earnings announcement, Flowers Foods’ stock dropped by 3.2% in pre-market trading, reflecting investor disappointment with the revenue miss. The stock had closed at $16.58 the previous day and was trading at $16.05 in the pre-market session. This movement positions the stock closer to its 52-week low of $15.27, amidst broader market stability. Trading at a P/E ratio of 15.36, the stock shows attractive valuation metrics relative to its near-term earnings growth potential. For deeper insights into FLO’s valuation and growth prospects, InvestingPro offers comprehensive research reports with expert analysis and advanced financial metrics.

Outlook & Guidance

Flowers Foods projects net sales for 2025 to be between $5.239 billion and $5.308 billion, with adjusted EPS ranging from $1.00 to $1.10. The company anticipates benefits in the second half of the year from increased shelf space and cost-saving measures. The focus remains on expanding its product portfolio and optimizing operational efficiencies.

Executive Commentary

CEO Ryals McMullen emphasized the company’s proactive approach to transformation, stating, "We are not satisfied with our results. And rather than passively waiting for our category to improve, we are aggressively transforming our portfolio through innovation and M&A." CFO Steve Kinsey added, "We continue to expect a second half benefit from shelf space gains and additional cost savings initiatives."

Risks and Challenges

• The decline in bread category volumes by 3% poses a challenge.
• Increased competition in traditional loaf products, down 6%.
• Macro-economic pressures may impact consumer spending habits.
• Supply chain optimization remains critical to maintaining margins.
• The successful integration of Simple Mills is essential for future growth.

Q&A

There was no live Q&A session in this earnings call transcript, leaving some analyst questions on future strategic initiatives and market conditions unanswered.

Full transcript - Flowers Foods (FLO) Q2 2025:

JT Rick, EVP of Finance and Investor Relations, Flowers Foods: Hello, everyone. This is JT Rick, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods twenty twenty five second quarter results. We will host a live Q and A session this morning at 08:30AM Eastern. Further details about the live call along with our earnings release, a transcript of these recorded remarks, and a related slide presentation are posted on the Investors section of flowersfoods.com.

Before we get started, keep in mind that the information presented here may include forward 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. Providing remarks today are Ryals McMullen, Chairman and CEO, and Steve Kinsey, our CFO. Ryals, I’ll turn it over to you.

Ryals McMullen, Chairman and CEO, Flowers Foods: Thanks, JT, and thank you for everyone joining the call. The progress we’ve made in repositioning our portfolio to better align with consumer demand gives me great confidence in our path to driving consistent long term growth. Investments in innovation and our acquisition of Simple Mills have shifted more of our sales to higher margin branded retail products, which accounted for 67% of sales in the quarter, up from 64% a year ago. This transition will take time to implement, but we expect further benefits as we execute our portfolio strategy and develop our deep pipeline of innovation. Results in the quarter were impacted by the continued challenging economic environment and shifting consumer trends that have had an outsized impact on the bread category.

Bread sales underperformed the general food category with volumes and track channels declining 3% compared to a 1% decline in food. Traditional loaf products, an area that we are especially exposed to, suffered particular pressure, down 6%. In recognition of those challenges and more intense competitive pressure, we are adjusting our expectations for 2025 results. To mitigate these headwinds, we’re targeting pockets of growth in various sub segments of the category and leveraging our strong brands to transition into adjacent categories. While in the short term, these moves have not been enough to fully overcome softness in the heart of our category, we are confident that over the long term, they are the right strategies and that they will position flours for stronger future growth.

While the bread category overall is under pressure, differentiated products, particularly those with better for you attributes, are outperforming. For example, organic and keto category sales rose three percent and four percent, respectively. We believe our leading share in these and other attractive subcategories positions us well to capitalize on the available growth opportunities. We’re also leveraging our strong brands to expand our product lines outside of the bread category in areas with significant market share potential where we believe we have a right to win. Our DKB snacking portfolio was just the first example of this strategy.

And our acquisition of Simple Mills amplifies this shift, providing access to the growing natural snacking category. Wonders move into the cake category, which is off to a strong start, is another example of extending our brands where it makes sense. And within each of these categories, we intend to aggressively innovate, bringing new products to market that meet unmet consumer needs. We are not satisfied with our results. And rather than passively waiting for our category to improve, we are aggressively transforming our portfolio through innovation and m and a to better align with consumer demand.

By addressing the factors within our control, we aim to maximize our near term results while supporting more consistent long term growth. These initiatives are gaining momentum underscoring what we believe to be the strength of our brands and the effectiveness of our strategy. Now I’ll provide an overview of the second quarter performance in the context of our four strategic priorities, developing our team, focusing on our brands, prioritizing margins and pursuing smart M and A. Following that, Steve will review our financial results and guidance, and then I’ll close with a discussion of key themes moving forward. First, I’d like to thank our team members for their unwavering commitment to providing our customers with the best products and service in the industry.

Their actions bolster my confidence in our long term potential. The acquisition of Simple Mills in the first quarter supplemented our industry leading team with an influx of new talent. The integration is progressing well, and I’m excited about the new skills and knowledge base their team members bring to Flowers. Equally important as having the right talent is providing team members with proper incentives to drive shareholder value. As we navigate through this challenging period, I’d like to highlight the alignment of our team with shareholder interests.

Every strategy, tactic, decision, and action we take is intended to drive long term shareholder value. And our incentive structure is aligned with that aim, with performance based compensation and long term incentive plans tied to value creation. For example, our annual cash incentive awards are tied to revenues and adjusted EBITDA results. And longer term incentive compensation via performance shares is tied to return on invested capital relative to our cost of capital and total shareholder return versus our peer group. Our entire team is working tirelessly to improve results and enhance shareholder value.

Our second strategic priority is focusing on our brands, an area of particular importance in the current environment. And that focus is paying off, driving outperformance in several areas. We maintain unit share overall with particularly strong results in sandwich buns and rolls, breakfast, and specialty premium loaf. And our brands are outperforming with DKB, Wonder, and Canyon all gaining unit share in the quarter. Our strong relative market share and brand loyalty has earned us increased shelf space and better shelf placement from retailers.

A notable trend will strengthen areas with differentiation, particularly better for you health attributes. Despite a 3% decline in bread category units, both DKB and Canyon grew unit sales and track channels up 412% respectively. Conversely, the area of least differentiation, private label, saw unit sales down 4%. Consumers are responding to differentiation and are willing to pay a premium for value added attributes. Recent innovations, including Nature’s Own Keto products and DKB protein bars and snack bites continued their strong performances.

Consumers are also seeking lower price points and smaller pack sizes, which our expanded line of small loaves addresses perfectly. Our sweet baked goods business benefited from the spring launch of Wonder Cake products, which significantly outperformed the category. We gained 70 basis points of unit share, the most of any vendor, led by Wonder’s strong performance. Importantly, Wonder’s growth did not cannibalize Tasty Cake sales, which posted flat unit share. Reception from retailers and consumers alike was enthusiastic and we’re excited about the growth potential for this business.

The national rollout will continue into the second half of the year as we add new distribution and work to drive additional trial through promotions. To continue our momentum, in the third quarter, we’re rolling out a strong lineup of on trend innovative products with an emphasis on better for you and value oriented items that target the strongest pockets of growth in our category. We’re continuing to capitalize on those trends by investing in additional innovation to further differentiate our product portfolio. Our third strategic priority is margins. The difficult industry volume trends combined with additional pressure from tariffs make our focus on margins even more crucial.

As always, we’re laser focused on cost and we’re in the process of implementing additional savings initiatives this year to offset top line pressure. Those initiatives, include labor and other efficiencies are making progress and we expect them to contribute to our second half results. Cost savings are necessary, but not sufficient to enable long term margin growth. Even more important is the execution of our portfolio strategy, whereby we work to increase the percentage of sales of our higher margin branded retail products. In conjunction with that shift, we also continue to focus on improving margins in our other sales category, so new and existing business can meet our margin targets.

Our fourth priority is smart M and A. As I mentioned earlier, the integration of Simple Mills is progressing well as we find efficient, mutually productive ways to collaborate and connect. The brand’s continued strong performance even in this challenging environment highlights its alignment to today’s consumer trends and bolsters our confidence in its long term potential. Impressively, in the second quarter, the brand outperformed both the total category and natural category in every track channel segment in which it participates. Results were particularly strong in crackers, where Simple Mills grew faster than any other natural cracker brand and was the third fastest growing total cracker brand.

Simple Mills’ strong performance enabled it to maintain its leading market share in natural cookies and crackers. Since we closed on the acquisition, results have been in line with our high expectations and we’re thrilled with the brand’s potential. Our capital allocation priority is to return to our more normalized leverage ratio enabling us to explore further opportunities. As always, we will remain disciplined in our approach and focused on growing shareholder value with an attractive risk reward balance. Now, I’ll turn it over to Steve to review the details of the quarter and then I’ll close with our outlook for the current business environment.

Steve?

Steve Kinsey, CFO, Flowers Foods: Thank you, Ryals, and hello, everyone. Turning to our second quarter twenty twenty five results. Net sales increased 1.5% from the prior year period. Price mix declined 1.2%, primarily related to our retail business, partially offset by improved pricemix for our foodservice business from executing our portfolio optimization strategies. Volume declined 2.4%, largely due to decreases in traditional loaf bread, partially offset by improvement in branded cake, branded organic and branded keto volumes.

The Simple Mills acquisition added 5.1%. Gross margin as a percentage of sales, excluding depreciation and amortization, decreased 110 basis points to 48.8% over the same quarter last year. Increased outside purchases of co manufactured product due to the Simple Mills acquisition and lower production volumes drove the decline. Selling, distribution and administrative expenses as a percentage of sales were 38.1%, a 40 basis point decrease over the prior year period due to lower distributor distribution fees, partially offset by higher workforce related costs and increased fleet expense related to the conversion to company owned territories in California. Excluding matters affecting comparability, adjusted SD and A was 37.7% of net sales, a 50 basis point decrease.

GAAP diluted EPS for the quarter was $0.28 per share, a $04 decrease over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter decreased $06 over the prior year period to $0.30 The Simple Mills acquisition contributed $61,400,000 in net sales, dollars 10,900,000.0 to adjusted EBITDA, and a $01 adjusted diluted loss per share. Turning now to our balance sheet liquidity and cash flow. We remain confident in our overall financial position. At quarter end, net debt to trailing twelve month adjusted EBITDA stood at approximately 3.2 times, increasing over the year ago period due to the acquisition of Simple Mills.

We held $11,000,000 in cash and cash equivalents and had $627,000,000 of remaining availability under our credit facilities. Year to date, cash flow from operating activities increased 98,000,000 to $267,000,000 benefiting from deferred tax benefits from recently passed legislation and improved working capital performance. Capital expenditures decreased 5,000,000 to 56,000,000, and dividends paid increased 3,000,000 to 105,000,000. We are adjusting our 2025 financial outlook largely due to softness in traditional loaf and more intense competitive pressure, which we expect to persist throughout the year. Including the partial year of benefits in Simple Mills, we now forecast net sales to be $5,239,000,000 to $5,308,000,000 adjusted EBITDA of $512,000,000 to $538,000,000 and adjusted EPS of $1 to $1.1 Excluding Simple Mills, we expect sales of 5.021 to 5,083,000,000.000, adjusted EBITDA of 482 to 505,000,000, and adjusted EPS of $1.08 to $1.17 per share.

We continue to expect a second half benefit from shelf space gains and additional cost savings initiatives, offset by the lapping of prior year cost saving initiatives, increased commodity cost headwinds, tariff driven expense increases and continued challenging category trends. The largest swing factors in our guidance are overall category performance and tariffs. Our prior guidance assumed an in year tariff impact of 27,000,000 to $30,000,000 for our legacy business and 4,000,000 to $6,000,000 for Simple Mills. Our current estimate of the in year tariff impact is 15,000,000 to $18,000,000 for our legacy business and 2,000,000 to $4,000,000 for Simple Mills. Approximately 92% of our key raw materials are covered in 2025.

Based on that coverage, our guidance incorporates inflationary headwinds for the remainder of the year. To minimize volatility and provide adequate visibility into cost, we have maintained our historical hedging strategy in which we attempt to increase the certainty of our key ingredient cost six to twelve months out. In the second quarter, we resumed the bakery rollout of our ERP system, successfully completing a third bakery. We plan to extend the rollout to further bakeries in the third quarter. To minimize the risk of operational disruptions, we are proceeding prudently and are confident in our ability to execute the transition smoothly.

Thank you. And now I’ll turn it back to Ryals.

Ryals McMullen, Chairman and CEO, Flowers Foods: Thanks, Steve. Now I’d like to discuss some of the trends impacting our current performance and the steps we’re taking to maximize present and future opportunities. I’ll first touch on consumer trends and then address the competitive environment. The consumer environment remains largely consistent with last quarter with persistent inflationary pressures impacting consumer confidence and purchasing behavior. Although food and beverage dollar sales have remained relatively stable, volume trends weakened mid quarter and into July.

Foodservice traffic continued to decline but improved sequentially while retail volume growth remained positive despite weakening trends. Consumers continue shifting retail food and beverage spend to value, club, and mass channels, while small format channels like convenience, dollar, and drugstores lag behind. Within the store, consumers are allocating more of their budgets to perimeter items like proteins, produce, and dairy and away from center store items like bakery, alcohol, and candy. Bread category trends were fairly stable throughout the quarter characterized by declining dollar sales and volume with particular weakness in traditional loaf. That weakness was primarily the result of declining unit sales per buyer caused by fewer product trips.

Consistent with what we’re seeing regarding food and beverage trends, research shows that one of the largest factors in consumer behavior in the bread category is health or dietary needs. That mindset has resulted in stronger performance in products perceived to have healthier attributes. Unsurprisingly, higher income consumers are increasing their food and beverage spend both in retail and food service channels much more than lower and middle income consumers. Their increased spend has been driven by a combination of higher prices and increased units. For lower and middle income consumers, the impact is much more affected by price increases with lower income consumers actually reducing the number of units purchased.

Looking at bread specifically, while volumes have been declining for all income brackets in recent periods, upper income consumers have cut back on bread purchases the most despite their overall increased food and beverage spend, while lower income consumer units have declined the least perhaps due to the strong value offered by a loaf of bread. As I mentioned earlier, we’re adapting our portfolio to align with current trends such as better for you and value oriented items that target the strongest pockets of growth in our category. In contrast to consumer behavior, the competitive environment has become more intense. Although promotional activity is relatively stable, the addition of new lower priced bread products has pressured results. That pressure has particularly affected the traditional loaf segment where our sales and track channels declined 7.9 in the second quarter compared to 5.5% in the first quarter.

We are actively working to improve these results. Average fresh packaged bread prices rose $03 in the quarter led by private label, increased $09 Branded pricing changes were mixed. Our promotional activity, increased slightly over the year ago period, remains focused on areas of category strength such as differentiated better for you products like DKB. Given the importance of innovation in the current environment, we’re focused on driving trial and repeat purchases of our new items that align well with consumer demand. Our aim is to lean into these areas to further solidify our leading market positions.

As always, we’re guided by our enhanced trade promotion capabilities and remain prudent in our use of promotional spending, carefully monitoring the return on investment. In closing, we’re focused on executing the five steps we’re taking to mitigate headwinds and drive profitability, which include: one, aggressively innovating unique premium products alongside value oriented offerings to offset the effects of a declining category two, leveraging the power of our top brands to move into other faster growing segments three, using M and A to focus on new growing product segments to enhance our growth and margin profile. Four, stabilizing the cake business by leveraging the power of the Wonder brand. And five, optimizing our supply chain and path to market to deliver industry leading operations and service. Despite the near term headwinds, we’re excited about the progress we’ve made in advancing these initiatives and we have additional plans that should enable further benefits.

We’re confident this approach will help us to maximize near term performance while developing our brands and capabilities to drive sustainable growth. Rest assured that we are not satisfied with our current results and we’re taking every reasonable step to drive long term shareholder value. Thank you very much for your time. That concludes our prepared remarks.

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