Bakery company Flowers Foods (NYSE:FLO) has built what has traditionally been a fragmented, locally oriented industry into a national powerhouse, with core brands like Wonder, Tastykake, and Nature's Own finding their way onto grocery store shelves across the country. Yet even bread makers can suffer from adverse business conditions, and coming into Wednesday's second-quarter financial report, Flowers investors wanted to see evidence that the baker could keep its growth trends on the rise. Flowers' results were disappointing on that front, and concerns about its future led the company to pull back on its expectations for the full year as well. Let's look more closely at what Flowers Foods said and whether investors should be worried about its future.
Flowers Foods leaves investors with a fallen cake
Flowers' second-quarter results didn't entirely live up to the high expectations that investors had. Sales climbed 5% to $935 million, but that was somewhat less than the 6% growth rate that most of those following the stock had wanted to see. Net income fell 1% to $51.2 million, and after making allowances for certain one-time factors, adjusted earnings of $0.26 per share only managed to match the consensus forecast among investors.
Taking a closer look at how Flowers Foods did, growth has remained a challenge for the company. As we saw last quarter, the acquisitions of Alpine Valley Bread and Dave's Killer Bread produced every bit of the growth in Flowers' overall numbers, and without them, Flowers' top line would have shrunk by a fraction of a percentage point. The direct store delivery segment suffered a volume drop of nearly 2%, and an improvement in pricing by 1% was insufficient to produce any organic growth for the business. Flowers said that competition hurt the branded-retail category, and non-retail sales also fell due to weak volume. The warehouse segment was healthier, with a nearly 6% rise in volume offsetting a 3% drop in pricing and product-mix impacts on sales. In particular, the store-branded retail, vending, foodservice, and branded bakery and deli items lines overcame negative impacts from lower foodservice and contract manufacturing pricing.
Flowers' warehouse segment continued its trend of finding greater profit growth than its direct store delivery counterpart. Pre-tax income for warehouse delivery jumped 12%, compared to just a 3% rise for direct store delivery. The jump largely reflects greater sales growth on the warehouse side of the business.
CEO Allen Shiver pointed to ongoing conflict between positive and negative factors. "Benefiting from strong consumer demand for organic breads," Shiver said, "our two recent acquisitions, DKB and Alpine, along with expansion markets, drove sales growth in the second quarter, offsetting sales declines in our core markets due to competitive pressures." The CEO also noted that the strategic acquisitions it has made have helped the company extend its geographical reach and boost the value of its brand portfolio.
Why Flowers isn't blooming
Looking forward, Flowers expects to aim toward making its internal business more efficient. In Shiver's words, "With Project Centennial, an in-depth review of our operations, we can enhance shareholder value by identifying new avenues for growth."
The problem for investors, though, is that Flowers Foods expects weakness in the industry to continue throughout the year. As a result, Flowers cut its guidance for the full 2016 year. Now, the company expects sales of $3.93 billion to $3.986 billion, down about $50 million to $100 million from its previous guidance. Similarly, adjusted earnings of between $0.90 to $0.95 per share is down about a dime from last quarter's predictions, and the threat of outright declines from year-ago levels for the bottom line has longtime investors nervous about Flowers' future prospects.
Because of that uncertainty, Flowers Foods' investors expressed their displeasure by sending the stock sharply lower. By midday, the stock was down more than 10%. In order to convince shareholders of the company's staying power, Flowers needs to work harder to produce the financial results that investors want to see and stay on track for future growth as well.