Dive Brief:
- Flowers Foods reported second-quarter earnings Wednesday, including a 5.2% increase in sales to $935 million. Recent acquisitions, including Dave's Killer Bread and Alpine Valley Bread, accounted for 5.6% of the overall sales increase.
- Net income dipped 1.2% to $51.2 million, and diluted earnings per share were flat for the quarter at $0.24 per share. Adjusted net income saw a 1.5% uptick, while adjusted diluted EPS rose 4%.
- The company lowered its outlook for fiscal 2016 sales, EPS and adjusted EPS, citing increased competitive activity and weak category volumes.
Dive Insight:
Before releasing earnings Wednesday, Flowers Foods disclosed in a securities filing that the U.S. Department of Labor had notified the company that it was due for a compliance review under the Fair Labor Standards Act. This covers requirements for minimum wage, overtime and other employment-related issues. Flowers drivers across the country have filed lawsuits against the company because they are classified as independent contractors, and therefore ineligible for overtime pay, benefits and other compensation.
Flowers didn't detail the specific labor issues the compliance review concerned, and the company said it had no further comment on the matter. As a result of the news, Flowers' shares tumbled 8.2%, hitting their lowest price since February.
Depending on how the compliance review turns out, Flowers may have to review and overhaul its business model, particularly distribution. Right now, contracted drivers deliver Flowers' baked goods from bakeries to stores. Having to hire them as employees and take ownership of their trucks could be costly and may offset profitability. Direct store delivery accounted for $786 million of the most recent quarter's total $935 million in sales and $108 million of $114 million in EBITDA, so a change to the delivery model would impact the vast majority of products sold.
But that's not the only challenge Flowers faces. While the company reported revenue growth, it came primarily from acquisitions, which offset what would have been a 0.4% sales decline. That means core brands like Wonder Bread, Nature’s Own and Tastykake may not be pulling their weight. These core brands may not be aligned with consumer trends, as more consumers seek out whole grain breads or are eating fewer grains and more gluten-free bakery items.