Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the sixteen weeks ended April 24, 2021 (filed May 20, 2021), not 2020 Q1 as stated in the request metadata. Comparative results are for the sixteen weeks ended April 18, 2020. Unaudited interim statements; amounts below are U.S. dollars.
Business context
Flowers Foods is a U.S. packaged bakery foods producer, operating one segment and 46 bakeries. Products include breads, buns, rolls, snack cakes and tortillas, sold under brands including Nature’s Own, Dave’s Killer Bread, Wonder, Canyon Bakehouse and Tastykake. Fresh products are primarily distributed through independent distributors using a direct-store-delivery model. Walmart/Sam’s Club accounted for 21.3% of sales.
Financial results
| Metric | Sixteen weeks ended Apr. 24, 2021 | Prior comparable period |
|---|---|---|
| Sales | $1,302.2 million | $1,349.4 million |
| Income from operations | $115.1 million; 8.8% of sales | $111.9 million; 8.3% of sales |
| Net income (loss) | $71.7 million; $0.34 per diluted share | $(5.8) million; $(0.03) per diluted share |
| Operating cash flow | $98.0 million | $106.2 million |
| Capital expenditures | $27.3 million | $21.7 million |
| Cash and equivalents at period end | $250.6 million | $252.7 million at prior-period end |
| Long-term debt, net carrying value | $889.6 million | $960.1 million at Jan. 2, 2021 |
Net cash used in financing was $135.8 million, including $42.5 million of dividends and net debt repayments. The company reported $921.3 million of total available liquidity at April 24, 2021, including cash and $670.7 million available under its credit and receivables facilities. The quarterly dividend was $0.20 per share, up from $0.19.
Material changes and drivers
- Sales fell 3.5%: positive pricing/mix of 3.4 percentage points was outweighed by a 6.9-point volume decline. Branded retail sales declined 3.3%, store-branded retail sales fell 14.6%, and non-retail and other sales increased 3.6%.
- Management attributed weaker sales to comparison with pandemic-driven retail stocking demand in the prior-year period and higher product returns as that behavior subsided. Non-retail sales recovered year over year but remained below pre-pandemic levels.
- Operating income increased 2.9% despite lower sales, reflecting lower production and administrative expenses, reduced bad-debt and depreciation costs, and prior-year compensation and legal-settlement comparisons. Operating margin rose to 8.8% from 8.3%.
- Net income improved from a prior-year loss that included a $116.2 million non-cash pension termination charge. Current-period results included a $16.1 million debt-extinguishment loss.
- The company issued $500 million of 2.40% senior notes due 2031 and redeemed $400 million of 4.375% notes due 2022, extending the earliest maturity of non-revolving debt to 2026. It also repaid balances on its credit and receivables facilities. Total debt decreased by $81.9 million during the period.
Outlook, commentary and risks
- Management expects fiscal 2021 sales to be below fiscal 2020 because of unusually strong pandemic-driven branded retail demand in the prior year; it could not estimate the magnitude or timing. Operating income is also expected to moderate as away-from-home dining normalizes. Fiscal 2021 has 52 weeks versus 53 in fiscal 2020.
- Long-term financial targets are 1%–2% sales growth, 4%–6% EBITDA growth and 7%–9% EPS growth. These are targets, not specific fiscal 2021 guidance.
- Management targets $30–$40 million of fiscal 2021 savings from optimization initiatives and expects $140–$150 million of fiscal 2021 capital expenditures, including ERP and digital-strategy spending. Digital-strategy consulting costs were $5.0 million in the quarter; approximately $20–$25 million of such costs were expected for the remainder of fiscal 2021.
- Commodity markets were described as volatile; ingredient and packaging costs were expected to remain volatile for the rest of fiscal 2021. Derivatives hedge exposures, but may not fully offset cost increases.
- COVID-19-related uncertainty includes possible shifts from branded to store-branded products, foodservice customer weakness, production or supply disruptions, and changing consumer demand. A significant shift toward store brands could adversely affect sales, earnings and cash flows.
- The company was defending 17 distributor misclassification complaints, including 10 seeking class or collective treatment. It said unresolved-case losses could not be reasonably estimated; management believed pending matters were unlikely to materially affect overall financial condition, results or cash flows, while adverse developments could affect a particular period.
- Other disclosed risks include dependence on independent distributors and the DSD model, customer concentration, input-cost volatility, and execution risk for the multi-year ERP and digital initiatives. Management reported compliance with debt covenants and effective disclosure controls.
Investor verification points
- Confirm the requested period: this filing reports Q1 fiscal 2021, not Q1 2020.
- Track whether branded retail and non-retail trends, product returns and sales mix develop as management expects, and whether fiscal 2021 sales and operating income moderate.
- Assess the effect of commodity inflation and hedging on margins, alongside delivery of the stated savings and capital-spending plans.
- Review debt reduction, liquidity availability, interest costs and dividend coverage as cash flows fund digital investment and shareholder returns.
- Monitor distributor-classification litigation and any changes to the independent-distributor model, plus execution, cost and timing of the ERP and broader digital program.