THOMASVILLE, Ga. — Flowers Foods (NYSE: FLO) today reported results for its 12-week second quarter and 28-week first half ended July 17, 2010. The company also updated its sales guidance for the year.
Summarizing second quarter results, Flowers Foods:
Increased net income to $33.8 million, an 11.3% increase over last year's second quarter of $30.3 million.
Improved operating margins to 8.4%.
Delivered diluted earnings per share of $.37, a 12.1% increase over last year's second quarter of $.33. Last year's results included a gain on acquisition of $.02 per diluted share relating to a May 2009 acquisition.
Reported a sales decline of 1.1% compared to second quarter last year.
Achieved volume increase of 1.9% and 1% growth from acquisitions; offset by 3.5% negative pricing/mix and .5% from the deconsolidation of a variable interest entity (VIE).
Maintained diluted earnings per share guidance of 10% to 15% growth; revised sales guidance for fiscal 2010 to growth of 1.0% to 2.0%.
George E. Deese, Flowers Foods' Chairman and CEO said, "We delivered strong earnings growth in the quarter and the first half of the year despite the weak economy and continued higher than normal promotional activity in the fresh bakery category. Our earnings growth would have been even greater if you take into consideration the $3.0 million, or $.02 per share, accounting gain on acquisition that was in last year's second quarter results.
"Even though sales for the quarter declined, we achieved volume increases in both operating segments. Since the beginning of the year, our sales trend has improved steadily as we executed our strategy to introduce new products and develop new business. In the most recent weeks, that trend has further improved, giving us confidence in our revised sales guidance.
"The underlying strength of our business model is evident in our cash flow, improved operating margin, the strength of our brands, and market share growth. Our team continues to focus on improving all aspects of the business and we are poised to take advantage of opportunities in the marketplace," Deese said.
Second Quarter Results
For the second quarter, sales decreased 1.1% to $607.7 million from the $614.4 million reported for last year's second quarter. The sales decrease was attributable to negative pricing/mix of 3.5% and .5% due to the deconsolidation of a VIE. Partially offsetting these declines were increased volume of 1.9% and a 1.0% contribution from acquisitions. The volume increase was primarily driven by Nature's Own soft variety bread and Nature's Own sandwich rounds in the branded retail channel and the cake category in the store-brand retail channel. These increases in volume were partially offset by sales declines in white bread, specialty bread, and foodservice. Overall, the branded retail channel was down as a result of lower white bread sales and a shift in snack cake sales from branded retail to store-brand retail as several of our customers introduced new store-brand cake programs.
DSD Segment: During the quarter, the company's direct store delivery (DSD) sales decreased 3.5%. The decrease consisted of negative pricing/mix of 3.9% and .6% due to the deconsolidation of the VIE. Increased volume of 1.0% partially offset the declines. Although total branded retail sales in the DSD segment decreased in dollars as a result of negative pricing and mix as compared to last year's second quarter, the channel experienced volume increases due to gains in the branded soft variety and sandwich rounds categories. The increased volume in the branded retail channel was partially offset by volume declines in the store-brand retail and foodservice channels.
Warehouse Delivery Segment: Warehouse delivery sales increased 10.1%, reflecting a 5.9% contribution from acquisitions and volume increases of 4.3%. These positive items were partially offset by negative pricing/mix of .1%. The volume increase was the result of increases in the cake category in the store-brand retail channel and a modest increase in the foodservice category and increases in the contract manufacturing category of the non-retail channel.
Net income for the quarter was $33.8 million, an increase of 11.3% over the $30.3 million in the second quarter of fiscal 2009. Diluted earnings per share increased 12.1% to $.37 as compared to $.33 last year.
For the quarter, gross margin as a percent of sales was 47.6%, up 190 basis points as compared to 45.7% in last year's second quarter. This increase was due primarily to decreases in ingredient costs, particularly flour, as a percent of sales. The decrease in ingredient costs was partially offset by higher workforce-related and packaging costs as a percent of sales.
Selling, distribution, and administrative costs as a percent of sales for the quarter were 35.9% compared to 35.3% in the prior year. This increase as a percent of sales was due primarily to higher workforce-related and advertising costs as a percent of sales. The advertising costs were incurred to support new product introductions. These increases were partially offset by a decrease in pension costs as a percent of sales.
Depreciation and amortization expenses for the second quarter remained relatively stable as a percent of sales compared to the prior year quarter. Net interest income for the quarter was $.8 million higher than last year's second quarter due to lower interest expense as a result of less debt outstanding. The effective tax rate for the quarter was 35.3% as compared to 36.6% last year.
Operating margin as a percent of sales for the quarter improved to 8.4% compared to 8.0% in the second quarter of 2009. EBITDA as a percent of sales for the quarter was 11.7% compared to 11.0% for the same quarter last year.
During the second quarter, the company invested $25.7 million in capital improvements and paid dividends of $18.3 million to shareholders. No shares were acquired during the quarter under the company's share repurchase plan. Since the inception of the share repurchase plan, the company has acquired 22.7 million shares of its common stock for $367.1 million, an average of $16.15 per share. The plan authorizes the company to repurchase up to 30.0 million shares of common stock.
First Half Results
Sales for the first half decreased 1.3% to $1.40 billion compared to $1.42 billion reported for the first half of 2009. The sales decrease consisted of negative pricing/mix of 2.9% and .3% due to the deconsolidation of the VIE. Partially offsetting these declines were increased volume of .4% and a 1.5% contribution from acquisitions. The volume increase was primarily driven by Nature's Own soft variety bread category and sandwich rounds in the branded retail channel and the cake category in the store-brand retail channel. These increases in volume were partially offset by decreased sales in white bread and foodservice.
DSD Segment: Year-to-date, the company's DSD sales decreased 3.4%. The decrease was attributable to negative pricing/mix of 3.0% and .4% due to the deconsolidation of the VIE. Volume was flat as compared to last year's year-to-date. Although total branded retail sales in the DSD segment decreased in dollars due to negative pricing and mix as compared to last year, the channel experienced volume increases due to increases in the branded soft variety and sandwich rounds categories. The increased volume in the branded retail channel was partially offset by volume declines in the store-brand retail and foodservice channels.
Warehouse Delivery Segment: For the first half, warehouse delivery sales increased 8.5%, reflecting an 8.4% contribution from acquisitions and volume increases of 1.9%. These positive items were partially offset by negative pricing/mix of 1.8%. The volume growth was the result of increases in the cake category in the store-brand retail channel and contract manufacturing in the non-retail channel.
For the first half, net income was $74.4 million, an increase of 9.9% compared to $67.7 million in last year's first half. Diluted earnings per share for the first half increased 11.0% to $.81 as compared to $.73 last year.
Gross margin for the first half was 47.7% of sales compared to 46.3% in the first half of 2009. This increase was due primarily to decreases in ingredient costs, particularly flour, as a percent of sales. The decrease in ingredient costs was partially offset by higher workforce-related and packaging costs as a percent of sales.
For the first half, selling, distribution, and administrative costs as a percent of sales were 36.4% compared to 35.9% last year. This increase as a percent of sales was due primarily to higher workforce-related and advertising costs as a percent of sales. These increases were partially offset by a decrease in pension costs as a percent of sales.
Depreciation and amortization expenses for the first half remained relatively stable as a percent of sales. Net interest income year-to-date was $1.4 million higher than last year's first half due to lower interest expense as a result of less debt outstanding. The effective tax rate for the first half was 35.5% as compared to 36.6% last year. The full-year tax rate is expected to remain at approximately 35.5%.
Operating margin as a percent of sales for the first half improved to 8.1% compared to 7.6% in the first half of 2009. EBITDA as a percent of sales was 11.3% year-to-date compared to 10.6% for the first half of last year.
During the first half, the company invested $54.9 million in capital improvements and paid dividends of $34.3 million to shareholders.
Fiscal 2010 Guidance
The company maintained its earnings guidance and revised sales guidance for fiscal 2010. Deese said the company now expects sales growth of 1.0% to 2.0%. For 2010, the company continues to expect growth in diluted earnings per share of 10% to 15%. Capital spending in fiscal 2010 is expected to be approximately $95 million to $100 million.
The board of directors will consider the dividend at its regularly scheduled meeting. Any action taken will be announced following that meeting.
Conference Call
Flowers Foods will broadcast its second quarter conference call over the Internet at 10:00 a.m. (Eastern) August 19, 2010. The call will be broadcast live on Flowers' Web site, www.flowersfoods.com, and can be accessed by clicking on the web cast link on the home page. The call also will be archived on the company's Web site.
Company Information
Headquartered in Thomasville, Ga., Flowers Foods is one of the nation's leading producers and marketers of packaged bakery foods for retail and foodservice customers. Among the company's top brands are Nature's Own, Whitewheat, Cobblestone Mill, Blue Bird, and Mrs. Freshley's. Flowers operates 40 bakeries that are among the most efficient in the baking industry. Flowers Foods produces, markets, and distributes fresh bakery products that are delivered to customers daily through a direct-store-delivery system serving the Southeast, Mid-Atlantic, and Southwest as well as select markets in California and Nevada. The company also produces and distributes fresh snack cakes and frozen breads and rolls nationally through warehouse distribution. For more information, visit www.flowersfoods.com.
Statements contained in this press release that are not historical facts are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. Other factors that may cause actual results to differ from the forward-looking statements contained in this release and that may affect the company's prospects in general include, but are not limited to, (a) competitive conditions in the baked foods industry, including promotional and price competition, (b) changes in consumer demand for our products, (c) the success of productivity improvements and new product introductions, (d) a significant reduction in business with any of our major customers including a reduction from adverse developments in any of our customer's business, (e) fluctuations in commodity pricing, (f) our ability to fully integrate recent acquisitions into our business, and (g) our ability to achieve cash flow from capital expenditures and acquisitions and the availability of new acquisitions that build shareholder value. In addition, our results may also be affected by general factors such as economic and business conditions (including the baked foods markets), interest and inflation rates and such other factors as are described in the company's filings with the Securities and Exchange Commission.
Source: Flowers Foods