Flowers Foods (FLO) Q2 2026 earnings call transcript

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 Scaglion, 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-backed-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 relaunch, 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.

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 would 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 if you look at it for the back half it a little skewed We expect some year declines in Q3 but then normalization for all the factors that Ross mentioned related to the new business wins reduced elasticities as we lapping prior year pricing in Q4 and a bit of stabilization in nature zone from a marketing investment continue to take hold Great.

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, you know, 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, you know, 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 will 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.

Thanks, Steve.

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 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. Certainly, there has been 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 have the underpenetration in half-loaves, sourdough, protein, fiber, some of these more functional attributes that consumers are looking for.

And so that's where our primary focus is. That 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.

Sure Scott Let me take it in two parts 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 primarily in our packaging area So our current guide didn 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, you know, 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 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, that's all we can say as it relates to 27.

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. The other area is going to be the price pack architecture. As Riles mentioned, coming together with new products around small loaf, bring to market innovation and sourdough, areas where the consumer has headed and where the consumer is.

We're probably underpenetrated on a portfolio basis. We have great products coming to market in the near term, but we're probably underpenetrated 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.

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.

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 architecture is one that I mentioned earlier. But price is definitely the contributing factor to answer your question.

Yeah, so from, you know, obviously the restructuring had some cost out in COGS. We've had good productivity as it relates to the in-bakery network, but clearly, you know, 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.

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 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.

Yeah, Mitch, it's 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 soils for all that. I would say that 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 think it's all price. It's a combination of price for some consumers, but also offering and product attributes that are driving some of that decline.

Yeah, well, I think we're always in the mode of continuous improvement. But in terms of 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.

Thanks, Mitch.

Hey, great. 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. Take care.