Flowers Foods Inc (FLO) Q2 2026 Earnings Call Transcript

And thank you for standing by. Welcome to the Flowers Foods second quarter 2026 results conference call. At this time, all participants are in listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, JT Rick, Executive Vice President of Finance and Investor Relations. Please go ahead.

Good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that were all posted earlier on our Investor Relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Riles McMullen, Chairman and CEO, and Anthony Scaglione, our CFO.

Riles, I'll turn it over to you.

Okay, good morning, everybody. As noted in our prepared remarks, our second quarter results did not meet our expectations. The fresh package bread category remained challenging, reflecting pressure on household budgets, shifting consumer preferences, and sustained competitive activity. Against this backdrop, we're accelerating initiatives to better align our resources and value proposition with where the market is heading. This includes advancing innovation in smaller formats, sourdough, and protein, improving our in-store execution, pursuing new business, and continuing to invest behind our leading brands. As the NatureZone relaunched new business wins and innovation initiatives build momentum, we expect them to support greater stability and improve performance. We have work to do, but we remain confident in our strategy, our brands, and the actions that we are taking. Shannon, we can go ahead and open up for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Steve Powers with Deutsche Bank. Your line is now open.

Great, everybody. Good morning. Thank you. Riles, maybe we can pick up a bit where you left off in that intro. I mean, if I think about the implied performance and your updated guidance for the back half, even at the low end, it seems to imply some acceleration and some improvement, certainly versus the exit rate of consumption that we saw coming out of 2Q. So maybe a bit more detail on the building blocks that you see to create that sequential improvement, because it doesn't sound like you're expecting the category to improve. It sounds like you're expecting your own standing versus the category to improve. So which of the initiatives are expected to be the most impactful? And, you know, I guess a little bit of how quickly we should expect them to manifest over the remainder of the year.

Okay. Yeah. Thanks, Steve. A few things, and I'll let Anthony chime in here as well in terms of guidance. But I would call out three primary factors to address the question you asked. One is we do have some pretty significant new business wins that are coming on in the back half. In addition to that, we took additional cost savings measures that will benefit the back half, and that's in addition to the roughly $200 million we've taken out of the business over the last several years. And I'd also call out innovation, which is a particularly important factor when you think about where the category is going, The speed of the shift in consumer preferences, frankly, got a little bit ahead of our innovation pipeline. But the good news is we have those things coming to fill those gaps in our offerings, whether you're thinking about protein, half loaves, sourdough, et cetera. All that's coming in the back half. And then as we move into the spring of next year, Anthony, anything you want to add?

No, I think you covered it. I would say, Steve, you know, if you look at it for the back half, the little skewed, we expect some year-over-year declines in Q3, but then normalization for all the factors that Roz mentioned, you know, related to the new business wins, reduced elasticities as we're lapping prior to your pricing in Q4, and a bit of stabilization in nature zone from a marketing investment continue to take hold.

Great. Maybe a little bit, if you could, a little bit more color. It sounds like you expect improvement both across the brand of retail business and the other segment where I would expect those new business wins to exist. Maybe a little bit more color as to where you see, which side of the business you see more improvement. And then, yeah, I'd love a little bit more color on what you're seeing with the NatureZone relaunch and kind of reasons for optimism with that. Thank you.

So, Steve, I think from the way we're looking at it, it's really split between our away-from-home business as well as our retail-branded business. So I would say we're seeing good opportunities and realization in both those areas, the timing of which some of it's going to come in Q3 and some of it will come in Q4. So it's balanced wins across the portfolio.

And, Steve, just to address your question on the NatureZone relaunch, you know, recall we just started this a couple of months ago. I would say it's going well. It's a little bit too early to see the actual results read through, but we're getting really good feedback from customers, social media, et cetera. So there's some early indicators that it'll be a successful campaign, but I think we've got to give it, as I said on the last call, we're going to have to give it a little bit more time for it to read through. That said, we do feel really good about the campaign and where we're headed with it.

Understood. Thank you, Bruce. Appreciate it. I'll pass it on.

Thank you. Our next question comes from the line of Scott Marks with Jeffries. Your line is now open.

Hey, good morning, everyone. Thanks very much for taking your questions. First thing I wanted to ask about, you noted in the prepared remarks, rising competition, rising promotional intensity. obviously, you guys took some pricing earlier in the year with the expectation that you might see competitors follow. And it doesn't sound like that's happened quite yet. So just wondering if you can kind of give us an update on your thoughts around, you know, the pricing dynamics in the category and where you are and, you know, any thoughts of changes to some of the actions you've taken to maintain, you know, maybe more competitiveness versus fears in traditional load?

Sure. I'll take a stab at that first. I think it's important to remember that the dynamics in the category are about a lot more than price. I think in certain segments of the portfolio, that may be a factor. And as we noted in the prepared remarks, we're taking, you know, a pretty intensive review of our pricing and promotional strategy. However, it is more than just price. And I would point more to consumer preference shifts. You know, certainly there has been, you know, some amount of trade down to private label and lower priced items. But I think the bigger factor, at least in our performance relative to the category, has to do with those gaps in our portfolio. You know, the underpenetration in half loaves, sourdough, protein, fiber, you know, some of these more functional attributes that consumers are looking for. And so that's where our primary focus is. It is not to say that we're ignoring the price equation. We are taking a hard look at that. And my initial thesis is there probably are some pockets of the portfolio where that's a factor, but I don't think it's the overall driving force of our performance.

Appreciate the thoughts there.

And then maybe, you know, there are some comments in the prepared remarks, I think, from Anthony about 2027, seeing some inflationary costs potentially ticking up, notably from commodity and fuel exposure. So just wondering if you can give us an update on where you're seeing inflation right now, how you're thinking about the exit rate in 26, and then maybe what you're assuming at this point for 27, as well as any other color you can share about 27, help us frame your thinking. Thanks.

Sure. Sure, Scott. Let me take it in two parts. You know, as we mentioned in Q1, most of our commodities for the balance of this year are fully hedged. We had some exposure, which I alluded to, in oil and diesel and indirectly in resin, and that's primarily in our packaging area. So our current guide didn't change because we saw added pressure from a commodity perspective. We assumed that pressure in Q1, and it hasn't really changed materially from where we were back in Q1. As I pivot to 27, we're still in the middle of our planning process for fiscal 27, so I can't provide further color on that in isolation. To Ryle's point, input costs are just one of many variables that we have to factor as it relates to price mix and the architecture and new innovation. So can't look at it in isolation. That being said, overall inflation has gone up in many of our categories from a pricing index perspective. It's something that we need to definitely address as we look at 27 and the exit velocity, as you mentioned, coming out of 26. It's something we're working to address going forward, and as I mentioned in my prepared remarks, more to come, but at this point, you know, that's all we could say as it relates to 27.

Appreciate it. I'll pass it on.

Thank you. Our next question comes from the line of Jim Solera with Stevens. Your line is now open.

Hey, guys. Thanks for taking our question. I wanted to follow up on your commentary to Steven Scott's questions there. If I look back to 2022, that was, I think, the last time we had kind of a significant commodity cycle. And if my model serves me correct, net price mix across the business was up kind of mid-teens in 2022, which was a big factor in helping to offset that. But correct me if I'm wrong, but it sounds like there's maybe not as much flexibility on a go-forward basis around pricing, given some of the competitive dynamics. So you could just walk us through what other levers you might have in the business to help offset that commodity inflation that we're seeing and kind of anticipating to continue to roll through in 2027.

Yeah, let me start on that, Jim. I would say clearly we have to look at productivity measures, which is part of our every annual process. And throughout the year, we're looking at ways to be more efficient in the bakeries and the network, et cetera. You know, we took action coming out of Q1 when we saw softness on the top line. That will accrue from a tailwind perspective as we exit 2026 into 2027. And as we said on the prepared remarks, that's roughly around the $20 million tailwind we'll have going into 2027. And the other area is going to be the price pack architecture, as Riles mentioned, you know, coming together with new products around small loaf, bring the market innovation and sourdough areas where the consumer has headed and where the consumer is. We're probably under penetrated on a portfolio basis. We have great products come into market in the near term, but we're probably under penetrated today. So when we look at those factors, it gives us confidence that, yes, price probably is not going to be the only lever to overcome the inflation. And as I mentioned earlier, a lot more work to do around that as we continue the 27 planning process.

My follow-up question is on DKB. In the prepared remarks, you guys touched on marketing pullback there. Just love some more commentary around. And is that a kind of a temporary reshift where maybe other brands need some more support? Are you guys reworking the marketing plan there? Did it shift kind of within the portfolio, maybe towards some of the innovation versus kind of the core fresh bread offering? Any thoughts that would be good?

Yeah, Jim, it's temporary. I mean, it's the way we laid out the cadence of our marketing and promo spend this year. So we focused a lot at the beginning of the year with, you may recall, the Rock Your Reset campaign that we did with DKB. And then also, to your point, also a focus on back-to-school. And so we should see more normalized levels of promo and marketing spend with DKB for the balance of the year. Great. Thanks. I'll pass it on.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Mitchell Pinheiro with Sturgeon & Company. your line is not open.

Hey, good morning. I, you know, I was looking at the, your fresh bread volume decline, which was a nine and a half percent, and that's a big number. But I was surprised at how well the gross margin held up despite the unit volume decline in fresh bread. How do you manage that?

Hey, Mitch. This is Anthony. I mean, clearly price had a big contributor in the price mix from a volume decline. So our pricing definitely was a positive contributor as it relates to overall. But as we look forward into the earlier comments, there's other variables that we are looking towards as we think about the balance of this year in 27 and price pack architectures, You know, one that I mentioned earlier of a price is definitely the contributing factor to answer your question.

And so, sort of negative, you know, fixed asset leverage, you've been able to manage that or, you know, how should we think about that?

Yeah, so from, you know, obviously the restructuring had some cost out in COGS. We've had good productivity as it relates to the bakery network, but clearly that's our highest fixed cost, and while we're looking at network optimization, that is more complicated and takes much longer to execute, but we're clearly constantly looking at ways to be more efficient within the four walls of our bakery and our network, and that drove some benefit, but that becomes harder and harder with the volume declines. So, as you can imagine, that's something that we're looking at and continue to look at as ways to optimize going forward.

Okay. And then, you know, as you look at the third quarter, do you expect volume declines to moderate?

Yeah, we don't break that out. As I mentioned, we expect Q3 year-on-year to be down from an overall sales perspective. So, that's going to be, you know, price and volume based. and then Q4 to have a little bit more stabilization as the new winds get more fully ramped. That's probably the most color I can give you in terms of the near term.

And then I guess two more questions. One with Dave's color red, you mentioned that shifts in consumer preferences as a reason that helped pressure the unit volume decline. What are you referring to?

Yeah, Mitch is Ross. Mostly, we think that it's the growth of sourdough. It's pretty remarkable, actually. I mean, that subsegment of the category has already grown to be a $1.3 billion subcategory. So it's been pretty tremendous growth. And in DKB, we only have sourdough on the West Coast currently. But as we mentioned earlier in the innovation pipeline, we have we have solves for all that. I would I would say that is is certainly one area and probably at least some amount of price sensitivity relative to Dave's.

But, you know, I don't as I said earlier, I don't I don't think it's all price. it's it's a combination of price for some consumers but also offering and and product attributes that are driving some of that decline okay thanks for that and then this final question is where um where do we stand with the comprehensive review where are we in that process are we are we close to the end or is this a a continuous improvement comprehensive review Can you shed a little light on that?

Yeah, well, I think we're always in the mode of continuous improvement. But in terms of, you know, the formal initiative of a comprehensive review, yeah, we're finished with that and beginning to execute on it. So a lot of the things we've talked about today, whether it's innovation or focus or better execution, all of those are folded in and are the result of that comprehensive review.

Okay. All right. Thank you very much. Thanks, Mitch.

Thank you. And I'm currently showing no further questions at this time. I now like to hand the call back over to Riles McMillan for closing remarks.

Thank you, Shannon. I just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest and support of our company. And as always, we look forward to speaking with you again next quarter.

This concludes today's conference. Thank you for your participation. You may now disconnect.