THOMASVILLE, GA. — Coming off a challenging year in 2023, Flowers Foods, Inc. anticipates flat to modestly higher sales and adjusted earnings per share in the new year. Announcing results for the 12 months ended Dec. 30, 2023, Flowers’ management said the outlook for the second half of this year is particularly cloudy because of an evolving promotional environment and uncertainty over how consumer behavior will change over the rest of the year.

Responding to the financial results and the guidance, Flowers shares fell 5%, trading as low as $22.14 the morning of Feb. 9, after closing at $23.39 the day before.

While Flowers’ net income was down sharply in 2023, adjusted net income was down modestly and adjusted EBITDA was nearly flat.

Flowers net income in the year ended Dec. 30 was $123.4 million, equal to 58¢ per share on the common stock, down 46% from $228.4 million, or $1.07 per share, in 2022. Sales were $5.09 billion, up 6% from $4.81 billion the year before. Adjusted net income was down 5.4% and adjusted EBITDA fell 0.1%. Adjusted earnings per share were $1.20.

In the fourth quarter ended Dec. 30, Flowers net income was $35.7 million, equal to 17¢ per share, down 27% from $48.6 million, or 23¢, in the final quarter of 2022. Sales were $1.13 billion, up 4.2%. Flowers said pricing/mix rose 5.6% while volume fell 2.4%. Papa Pita, acquired in February 2023, added 1.1% to sales.

Higher selling, distribution and administrative expenses tightened operating margins by 180 basis points (150 basis points excluding special items), reflecting higher labor, insurance, marketing and technology expenses.

Also during the quarter, the company recognized $6.3 million in impairments, most of which was associated with a cost method investment.

Volume trends at Flowers improved in the fourth quarter of the year, particularly for branded product. For the full year, Flowers’ sales volume was down 5.3%, but only 2.4% in the final quarter of the year. For branded product, sales volume was down 2.6% in 2023 but only 0.3% in the last quarter. For other products, sales volume fell 7.8% last year but 4.4% in the fourth quarter.

Flowers outperformed what A. Ryals McMullian, chairman and chief executive officer, described as a weak category.

“Our brands gained 10 basis points of unit share in tracked channels versus the prior-year period and, for the first time since the first quarter of 2022, grew dollar share, which was up 20 basis points,” he said. “In grocery, we performed even better, gaining 20 basis points of unit and dollar share.”

In the fourth quarter, private label continued to gain share in response to strong prices, McMullian said. The trend is moderating, he added.

“Private label products remain strongest in the loaf categories with the least differentiation,” he said. “Areas with greater product differentiation showed declines in private label share. We continue to grow share in the specialty premium, breakfast, and sandwich buns and rolls subcategories, gaining 170, 100, and 40 basis points, respectively.”

During a Feb. 9 call with investment analysts, McMullian said the share gains were “admirable” but conceded the larger picture was less than optimal.

“We understand that market share performance in a declining category doesn’t necessarily translate in the bottom-line profitability, but it does show the investments that we’re making in our brands enable us to continue relative strong performance in a pressured category,” he said.

Promotional levels at Flowers and for the baking category remain well below what was typical before the pandemic, but the percentage of Flowers products sold on promotion increased in the fourth quarter, McMullian said.

“Our promotional activity increased slightly, and consumer response to promotions reverted somewhat toward more historic levels,” he said.

Sales in 2024 are expected to be flat to up slightly at Flowers. In its guidance for 2024, Flowers said the company expects modest sales growth in the new year following years of sharp sales gains, driven by price increases. The company said sales this year will total $5.09 billion to $5.17 billion, unchanged to 1.6% above 2023 sales. Adjusted EBITDA was forecast at $524 million to $533 million, up 4% to 6% from last year; adjusted earnings per share are anticipated at $1.20 to $1.30, flat to up 8% from $1.20.

The sales guidance “assumes positive pricing actions that are already in place or agreed to,” said R. Steve Kinsey, chief financial officer and chief accounting officer. He said the company also expects “slight volume degradation” both because of category weakness and business exits.

“We expect 2024 to be the last year of meaningful business exits,” he said.

Business exits have been pursued to focus on higher margin opportunities, McMullian said. The company has rationalized accounts that “fail to meet our hurdle rate,” he added.

“In the short term, that process results in some temporarily stranded overhead costs as volumes decline, obscuring the underlying progress we’re making,” he said. “Over time, we expect our growth initiatives to drive additional volume and fill that capacity with higher-margin business, ultimately improving overall corporate profitability.”

Asked by an investment analyst about margin prospects, McMullian said the “stranded overhead” represents a near-term drag but an exciting opportunity in the longer run as capacity is filled with more profitable business.

“Obviously, that won’t come all at once,” he said. “It will take a little bit of patience. But we’ve got a really significant opportunity ahead of us to refill that extreme low margin business.”

Both Kinsey and McMullian expressed caution about the outlook for the second half of 2024, citing uncertainty about consumer behavior and the promotional environment.

Other factors affecting guidance for 2024 cited by Kinsey include a higher tax rate and a higher net interest resulting from payments associated with the settlement of litigation in California.

Capital expenditures of $120 million to $130 million are forecast, of which $3 million to $6 million are related to an enterprise resource planning systems upgrades.

“The 2024 outlook reflects confidence in our ability to successfully execute in a challenging category,” McMullian said. “Results are expected to benefit from moderating commodity costs, positive pricing actions, and savings initiatives. Our strong execution on promotions is driving improved returns, but the competitive environment remains rational.”

Asked by an analyst about the company’s progress in geographic markets where its presence is smaller, McMullian said Flowers continues to make steady progress in the Northeast and still has “a lot of room to grow.”