Dive Brief:
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Flowers Foods announced a third-quarter net income drop of $73.8 million, resulting in a loss of $33.6 million. Sales were up 1.5% to $932.8 million, compared to $918.7 million for the third quarter of last year, according to the company's latest earnings report. For the rest of 2017, the Georgia-based company said it continues to expect sales to be in the range of $3.88 billion to $3.92 billion, and for adjusted diluted EPS to be in the range of 85 to 90 cents.
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Strong demand for Dave's Killer Bread drove sales and market share during the third quarter, Flowers Foods said. However, earnings were impacted by strategic charges needed to lower cost structure and streamline the company, increase focus on the strongest brands, and improve the supply chain, the company said.
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Allen Shiver, Flowers Foods president and CEO, said in a statement that the company's work behind the scenes to try to cut costs internally as part of Project Centennial — a five-year plan to strengthen its competitive position and drive profitable revenue growth — has been paying off. "We are streamlining our product assortment, reducing complexity in the marketplace and in our bakeries," he said in the report. "With our increased focus on innovation and product differentiation, our team is developing a robust innovation pipeline to drive brand growth. I am confident the changes we are making will build shareholder value over the long term."
Dive Insight:
Flowers Foods hasn't had an easy time lately. Company layoffs and buyouts and restructuring expenses have created financial challenges. The buyout plan, first announced in July, will result in a net headcount reduction of approximately 450 people, including a 15% reduction in management positions.
Consulting costs related to the Project Centennial restructuring initiative are expected to be $5.5 million to $6.5 million for the rest of this year, indicating how dedicated the company is to making a change. In fact, the amount spent on selling, distribution and administrative expenses was $355.6 million — worth 38.1% of the quarter's sales. This was primarily due to the consulting costs and legal settlement charges.
But the cost-reduction plan depends on more than just a lower employee headcount. The company announced in May it is separating into two units: bakery and snacking and specialty.
The bakery business, which includes Nature’s Own, Wonder and Dave’s Killer Bread, was intended to focus on driving brand growth and profitability through incremental innovation, execution and cost-efficiency. Branded organic products — particularly Dave's Killer Bread — saw significant sales growth during the most recent quarter, driven by volume gains and new breakfast items — including bagels and cinnamon raisin bread — that launched during the second quarter.
The snacking and specialty section, which includes the items outside of the bread aisle such as Tastykake and Mrs. Freshley's, was planned to drive brand growth and profitability using new product innovation and building scale in growing categories. In the last quarter, increased competition in branded cake products brought challenges.
Flowers Foods emphasizes its core items that bring in revenue. However, Dave's Killer Bread has been the consistent engine of sales growth and diversification. The manufacturer can't keep relying on Dave's Killer Bread products to lift performance. As long as the diversification and innovation efforts pay off — and expenses stop mounting from Project Centennial and buyouts — the company may be able to get back on solid footing in 2018.