Flowers Foods has forecast a slowing in its annual sales growth, with volumes likely to be pressured by further product rationalisation.
The owner of bakery brands Dave’s Killer Bread and Nature’s Own is forecasting sales to come in at $5.09bn to $5.17bn in the fiscal year started in January. That range represents guidance from flat year-on-year to up 1.6%, a slowdown from the 5.9% pace in the 12 months ended on 31 December.
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Ryals McMullian, chairman and CEO of the US business, said the consumer switch into private label seen through the inflationary cycle is “moderating” but added the company is still seeking to boost the gross margin by eliminating less-profitable products.
“Our portfolio strategy is driving top line and gross margin expansion as we focus on shifting more sales to higher margin branded products,” he explained.
“With a focus on profitability over volume, we have expanded the margins of existing business, while rationalising accounts that fail to meet our hurdle rates. In the short term, that process results in some temporarily stranded overhead costs as volumes decline, obscuring the underlying progress we are making.”
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Flowers Foods saw an improvement in volumes during 2023, although they remained in negative territory – down 2.4% in the fourth quarter, compared to a decline of 7.3% in the opening three months.
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By GlobalDataIt was a similar picture in Flowers Foods’ branded bakery sold into retailers, with volumes down 0.3% in the fourth quarter versus a 6.3% drop in quarter one.
CFO Steve Kinsey said the sales outlook is based on further pricing that has either already been implemented or has been agreed with customers, adding that those dynamics will be “offset by slight volume degradation from continuing category declines and selected business exits”.
However, he emphasised 2024 will be the “last year of meaningful business exits, with most of the impact concentrated in the first half of the year”.
Private label, in which Flowers Foods also participates, benefited in the fourth quarter and throughout 2023 in the consumer cost environment, McMullian said, even though the trend is abating somewhat.
“Price gaps are also narrowing as private-label prices continue to increase faster than branded counterparts,” he added.
McMullian suggested bakery volumes are still trying to find an “equilibrium” in the post-pandemic era. But he was asked when discussing the results with analysts where most of the pressure on volumes is coming from, whether it be from the business exits or organic declines.
“Most of it is still going to be in business exits. There is a lot of opportunity to go back and refill that capacity with higher-margin business, which will not only drive profitability but go a long way to help bring the unit volume back up,” he explained.
Flowers Foods adjusted net income dropped 5.4% to $256.3m in 2023, while adjusted EBITDA fell 0.1% to $501.7m.
Adjusted earnings per share were down seven cents at $1.20 and are predicted in a range of $1.20 to $1.30 for the new year. Adjusted EBITDA is expected to be $524m to $553m.
McMullian is also open to M&A to fill gaps in the portfolio, with, he said, the “capacity to do a meaningful acquisition”.
He added: “Our goal is to identify compelling brands that complement our existing portfolio and skew towards a ‘better-for-you’ nutritional profile. The M&A market is beginning to show signs of improvement and I am more encouraged than I have been in several years by the developing pipeline of potential opportunities.
“We continue to monitor the deal market, proactively building relationships with owners and founders, and actively vetting potential acquisitions and investments that could add capabilities, brands, or products to our robust existing line-up.”
