THOMASVILLE, GA. — From market share gains and widening margins to hopeful category trends, the outlook for Flowers Foods, Inc. specifically and the baked food sector in general continues to brighten, said A. Ryals McMullian, Flowers’ chairman and chief executive officer.

McMullian offered prepared comments Aug. 16 about the company and its outlook in concert with the release of second-quarter financial results for Flowers Foods. McMullian said sales trends in the second quarter exceeded management expectations and that the company was affirming its full-year guidance for 2024.

Flowers Foods net income in the quarter ended July 13 was $66.97 million, equal to 32¢ per share on the common stock, up 5% from $63.76 million, or 30¢ per share, in the second quarter last year. Net sales were $1.225 billion, down 0.25% from $1.228 billion in the second quarter last year.

Adjusted earnings during the quarter were up 7% from a year ago, to $75.5 million. Special items during the quarter included $8.2 million in restructuring and impairment charges, versus $2.5 million in the second quarter last year.

The sales decrease was attributed to volume declines in connection with business exits in 2023, offset by positive pricing/mix. Branded retail sales were up 0.3% from the second quarter last year while other sales were down 1.2%. Overall, pricing/mix were up 1% and volume was down 1.2%.

McMullian said Flowers delivered “solid top- and bottom-line performance” in the quarter.

“Our brands outperformed the fresh packaged bread category, growing units in tracked channels and generating leading unit and dollar share gains,” he said. “Private label and away-from-home margins maintained their positive trajectory as we improved profitability in existing accounts and filled available capacity with new, higher-margin business. And savings initiatives are taking hold, driving a meaningful sequential improvement in costs.”

During the quarter, Flowers gained 40 basis points of dollar market share in the fresh packaged bread category and 20 points of unit volume share, McMullian said. Unit volume growth in the category was 1.5%. He said Flowers achieved the largest dollar and unit share gain of any company in the baking category.

“Sales came in slightly better than we expected, helped by improving volume trends in the fresh packaged bread category, which turned positive toward the end of the quarter,” he said. “We believe this improvement was influenced by consumers shifting more spending to at-home eating as they look to economize.”

Even with the improvement, the bread category overall was flat. McMullian said Flowers gained momentum as the quarter progressed with trends strongest in the final four weeks, when the company scored a 40-basis-point gain in unit volume share.

“Particular areas of strength included sandwich buns and rolls, breakfast, and loaf where we gained 80, 30, and 20 basis points of unit share respectively,” he said. “Importantly, our performance improved in both the mass and grocery channels.”

Offering a more granular look into the company’s sales performance in the quarter, McMullian said Flowers is focusing on sub-categories of bread with the greatest growth potential for the company, including specialty/premium, sandwich buns and rolls and breakfast.

He also appeared cheered by strength Flowers achieved in the quarter away from its historically core southeastern markets. He cited notable strength in “underpenetrated regions such as the Northeast, Mid-Atlantic and Upper Midwest where new business wins and strong market execution drove continued growth.”

The positives came against a backdrop of sales pressure relative to a year ago because of business exits the companies opted to make in the third quarter of 2023. McMullian said the headwinds resulting from the exits “are waning.”

“The impact of those exits peaked in the first quarter and will diminish significantly in the second half of the year with virtually no effect in the fourth quarter,” he said.

Reviewing the performance of top brands at Flowers, McMullian said Wonder bread enjoyed a 10% jump in unit sales in the second quarter. Dave’s Killer Bread was up 7%, Canyon Bakehouse saw a 5% increase and Nature’s Own was flat.

“That performance drove the largest dollar and unit share gain of all companies in the category, with each of our national bread brands gaining or maintaining dollar share,” he said. “Dave’s Killer Bread and Wonder each gained 20 basis points of dollar share, while Nature’s Own gained 10 basis points.”

While the weakest performer of the company’s roster of brands, McMullian said the Nature’s Own results were “particularly noteworthy” in view of the effects of inflationary pressures on consumers.

“The brand’s focus on the consumer’s desire for both differentiation and value drove improved results despite that environment,” he said.

Keto bread sold under the Nature’s Own brand enjoyed an especially strong quarter, he said.

The Canyon Bakehouse brand, which had been treading water in recent quarters, enjoyed a 260-basis-point jump in dollar share during the quarter, McMullian said. The improvement reflected the “benefit of recent capacity additions,” he said.

Commenting on the company’s improving margins, McMullian credited workforce reductions, reduced third-party spend, more effective marketing spending, improvement in leased labor and indirect procurement spending and efficiencies in the company’s direct-store delivery network.

R. Steve Kinsey, chief financial officer, said gross profit margins, excluding depreciation and amortization, increased to 49.9%, a 90 basis point improvement from last year. He attributed the improvement to “moderating ingredient and packaging costs, improved sales price/mix, and decreased product returns.” Lower volumes and higher workforce-related and bakery maintenance costs were negatives, as was an increase in outside purchases of products.

For the full year, Flowers anticipates sales of $5.091 to $5.172 billion, unchanged to up 1.6% from 2023. Adjusted EBITDA is expected to be $524 million to $553 million, and adjusted earnings per share are expected to fall between $1.20 and $1.30, versus earnings of 58¢ in 2023, $1.20 on an adjusted basis.

“We are comfortable with the middle of our guidance range,” Kinsey said. “Key factors that could shift results within our guidance range include the potential impact of an uncertain economy on the consumer and promotional environment, and the transition of our California distribution.”

He said the effects of business exits will remain a headwind in the third quarter but will be fully lapped by the end of the fourth.

Offering an update on the repurchase of distribution rights in California, Kinsey said Flowers is making progress and expects the process to be completed in 2025.

For 2024, he said 95% of key raw materials have been covered.

“Based on that coverage, our guidance incorporates a moderation in ingredient costs in 2024 relative to the prior year,” he said. “To minimize volatility and provide adequate visibility into costs, we have maintained our historical hedging strategy in which we attempt to increase the certainty of our key ingredient costs 6 to 12 months out.”

Regarding the evolving consumer environment, McMullian said spending has been shifting to food at home and, more specifically, to value channels, including mass and club stores.

“Within the store, bread, which appeals to those seeking value, is outperforming the overall food category, with unit sales down only 0.2% compared to food category units, which declined 0.7%, as shown,” he said.

Both figures represented a setback from the first quarter, when bread was up 0.3% and general food was down 0.4%.

Within the bread category, McMullian said premium products are performing well, showing that consumers are seeking differentiation. The strong results of Dave’s Killer Bread are consistent with this trend, he said.

“Subcategories with more differentiated offerings, such as dinner bread and rolls, sandwich buns and rolls, and specialty/premium, outperformed the less-differentiated traditional loaf,” McMullian said.

Also encouraging for the baking industry, private label lost share during the quarter, McMullian said, noting that price gaps with branded products narrowed. He shared Circana data showing private label unit volume slipped 0.3% in the second quarter, versus a 0.5% gain in the first quarter and a 0.9% gain in the second quarter of 2023.

Flowers increased its promotional activity during the quarter even as it widened its profit margins.

“The competitive environment remains rational with promotions below pre-pandemic levels,” McMullian said. “As economic pressure drives many consumers to seek greater value, their response to promotions has increased, though off of a low base due to the pandemic impact. And in that environment, we have increased our promotional levels somewhat, resulting in a higher percentage of product sold on promotion.”

Asked during a question-and-answer session with investment analysts Aug. 16 whether Flowers’ ability to gain share and improve margins while boosting promotions may prompt copycat activity among competitors, McMullian did not rule out the possibility.

”We are accounting for that risk as we go through the year,” he said. “We called it out at the beginning of the year, and I think it’s still prudent to call it out now. As we noted, consumers are responding a bit more to promotions, whereas not too long ago, they were not. And we all know that alongside of differentiation, the consumer is seeking value.”

Year-to-date net income at Flowers was $140.01 million, or 66¢ per share, up 4.1% from $134.47 million, or 63¢, the year before. Sales were $2.80 billion, up 1.4%.