Flowers Foods (FLO) Q3 2026 Earnings Call Transcript

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DATE

Friday, Nov. 13, 2026

CALL PARTICIPANTS

• Executive Vice President of Finance and Investor Relations - J.T. Rieck
• Chairman and CEO - Ryals McMullian
• CFO - Anthony Scaglione

TAKEAWAYS

• Net Sales -- $1.169 billion, representing a 4.7% decrease as favorable price/mix was more than offset by lower sales volume.
• Net Income -- $14.4 million, a 63.6% decrease driven by lower volume, increased marketing investment, and higher logistics costs.
• Adjusted Diluted EPS -- $0.10, down from $0.23 in the prior-year period.
• Adjusted EBITDA -- $78.9 million, a 33.2% decrease reflecting a margin of 6.8% of net sales.
• Branded Retail Net Sales -- $772.1 million, a 5.1% decline resulting from an 8.6% drop in volume partially offset by a 3.5% increase in pricing/mix.
• Other Net Sales -- $397.0 million, a 4.0% decrease primarily due to lower sales of store-branded products and discontinued business.
• Total Volume Trends -- 7.0% decline across the business, with the Other sales category reporting a 4.9% volume drop.
• Pricing/Mix -- 2.3% increase for the total company, supported by pricing actions taken earlier in the year.
• Production Costs -- 53.3% of net sales, a 120-basis point increase due to the impact of lower production volumes on workforce-related costs.
• Adjusted SD&A Expenses -- 39.9% of net sales, representing a 160-basis point increase from higher marketing and logistics expenses.
• Cost Takeout Goal -- $20 million in estimated savings for fiscal 2026 focused on procurement improvements and bakery productivity.
• Fiscal 2026 Sales Guidance -- $5.016 billion to $5.063 billion, revised downward from the previous range of $5.070 billion to $5.142 billion.
• Fiscal 2026 Adjusted EBITDA Guidance -- $415 million to $430 million, compared to the prior forecast of $453 million to $481 million.
• Fiscal 2026 Adjusted Diluted EPS Guidance -- $0.63 to $0.68, reduced from the previous target of $0.75 to $0.85.
• Capital Expenditures Guidance -- $115 million to $125 million for the full fiscal year.
• Cash and Liquidity -- $72.2 million in cash and cash equivalents at the end of the third quarter.
• Long-term Debt -- $1.675 billion, representing a decrease from $1.755 billion at the start of the fiscal year.
• Operating Cash Flow -- $319.9 million for the 40-week period, a decrease of $0.9 million versus the prior-year period.
• Foodservice Performance -- Growth in foodservice sales provided a partial offset to declines in other non-retail categories.
• Category Trends -- 3% decline in units for the total fresh packaged bread category during the quarter.

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RISKS

• Scaglione stated, "We're expecting continued pressures in the first half of next year as it relates to the inflationary side," regarding rising commodity and ingredient costs.
• McMullian noted that high-income consumers, who index highest for Dave's Killer Bread, use GLP-1 medications the most and this has pressured brand consumption.
• Scaglione warned that the company is "building in that flexibility ahead of any potential constraints that could arise" concerning debt covenants and financial flexibility in 2027.

SUMMARY

Flowers Foods, Inc. (NYSE:FLO) reported a decline in third-quarter results as the company faced lower sales volumes and persistent weakness in the traditional loaf segment. Management reported that while the relaunch of Nature's Own with cleaner labels is showing sequential improvement, the pace of recovery has been slower than anticipated. The company is actively pursuing volume growth in foodservice and private label channels to mitigate operating deleverage caused by branded retail declines. CEO Ryals McMullian stated that the company is accelerating strategic initiatives to close innovation gaps and align with evolving consumer preferences. CFO Anthony Scaglione indicated that management is proactively engaging with bank partners to ensure financial flexibility for the upcoming fiscal year amid a challenging commodity environment.

• McMullian attributed recent unit pressure on Dave's Killer Bread to shifting consumption habits among high-income consumers using GLP-1 medications: "DKB indexes the highest among high-income consumers. They are also the ones that use GLP-1s the most. And so not terribly surprising to see a bit of pressure there."
• Management is expanding the Dave's Killer Bread sourdough line nationally following successful growth in the California market.
• The company reorganized its foodservice sales force to use internal employees, which McMullian stated "has been a huge benefit for us" in securing new business wins.
• McMullian identified the 20-ounce traditional loaf as the weakest part of the bread category and confirmed it remains a primary stabilization priority for the Nature's Own brand.
• The company reported that promotional effectiveness was uneven across retail channels, with weaker performance in the mass channel compared to traditional grocers.
• Management is evaluating its 2027 capital allocation strategy, including the quarterly dividend policy and capital expenditure plans, with an update expected by year-end.

INDUSTRY GLOSSARY

• Clean Label: A consumer-driven movement for food products containing fewer, simpler, and more natural ingredients.
• Dave's Killer Bread (DKB): A Flowers Foods brand focused on organic, protein-rich, and non-GMO bread products.
• Direct-Store-Delivery (DSD): A distribution method where products are delivered directly to retail stores by the manufacturer.
• GLP-1: A class of medications for weight loss and diabetes that can alter caloric intake and food consumption patterns.
• Nature's Own: The leading bread brand in the Flowers Foods portfolio, recently relaunched with a non-GMO and clean label formulation.
• Non-GMO: A certification that a product was manufactured without the use of genetically modified organisms.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Flowers Foods Third Quarter 2026 Results. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

J. Rieck: Thank you, and 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 Ryals McMullian, Chairman and CEO; and Anthony Scaglione, our CFO. Ryals, I'll turn it over to you.

A. McMullian: Okay. Thanks, J.T. Good morning, everyone. As you heard in our prepared remarks, our results reflected many of the challenging conditions we discussed last quarter and highlighted areas where we need to move faster and with greater emphasis on focused execution. While we're seeing encouraging signs in the business, including improving sequential trends and growing awareness in the Nature's Own franchise, the pace of improvement was slower than we anticipated, but we are not sitting still. We're accelerating initiatives already in flight to better align our value proposition where the market is going. This includes advancing innovation, pursuing new business and investing behind our leading brands.

We're excited about the progress we're making and what it means for the future of our business. While it's taking some time for these initiatives to lift our results, they are putting us on a stronger path forward and increasing our confidence in the long-term potential of the business. The large, attractive markets that we serve across fresh packaged bread, cake, better-for-you snacking and foodservice offer compelling opportunities for future growth. And our strength, anchored by our leading brands, extensive network and, most importantly, our people, provide a solid foundation to drive long-term shareholder value. So with that, Victor, we're ready to open it up for questions.

Operator: [Operator Instructions] Our first question will come from the line of Jim Salera from Stephens.

James Salera: Ryals, I wanted to ask you about the pricing strategy going forward, given in the prepared remarks, you mentioned heightened promotional environment. Obviously, we can see kind of the divergence in the share trends. And I wonder if part of that just has to do with the net price you guys are still getting. Can you give us any thoughts on how we should think about the pricing lever the back half of this year or I guess, 4Q of this year, but then really more importantly, into '27 as we kind of fine-tune our models and think about how much you'll be able to offset some of the inflation headwinds we've seen?

A. McMullian: Yes. Sure, Jim. Thanks for the question. Yes, certainly, price is something that we're looking at. I think it is only part of the story, though. We believe that the bigger issue is some of the shifts that we're experiencing in the category in terms of consumer preferences, price pack architecture, which obviously has a price element to it, of course, meaningful differentiation. Those are the items that are winning in the category right now. And where we currently have gaps, though we are filling those gaps, as you know. In fact, as we speak, we're doing that. We just relaunched our Nature's Own small loaf, for example. And we have more of that coming in '27.

So I think we are taking a hard look at price, promotions, promotional effectiveness. Leveraging the tools that we have to be sure that the promotions we do run are as effective as possible. That said, the promotional environment has been pretty intense. Particularly this last quarter, we saw a pretty intense promotional activity. So price sensitivity among consumers is certainly an issue, but it is not the only issue.

James Salera: So if we try to put some guardrails around that, I mean, do you think it's possible that we could still see a low single-digit benefit from price/mix in '27? Or should we be thinking about it as more flattish?

Diego Scaglione: Yes. I think we're not in a position to talk about '27 right now. I think all the dynamics that Ryals mentioned is obviously going to play a factor where wheat will settle out, and it's going to be a tale of 2 stories, organic wheat versus traditional wheat. They're still exhibiting different cost inputs. So that's going to have a factor on how we look at the overall portfolio, both on the traditional loaf as well as on the organic side.

James Salera: Okay. And then if I could just ask one other one on the input costs. We've talked to a lot of folks this earnings season about transportation cost increase. And so I was just hoping you could help us size up what you guys are seeing in your freight contracts. Maybe help quantify how we should think about that as a percentage of sales and, kind of the magnitude of the increase as we move forward and look to '27.

Diego Scaglione: Yes. So maybe just talk about a little bit of inflation and commodities overall just to give that context. So for fiscal '26, generally speaking, we benefited from our hedging programs. We saw rising commodity prices, specifically in the back half. Year-on-year in Q3 for commodities, ingredients, packaging, they were relatively flat on a rate basis compared to a year ago. So markets, while they were elevated during the quarter versus 2025, our coverage and inventory provided us protection. In Q4, and it was already in our guide, there's nothing new. We already factored this in.

We expected higher raw material inflation as coverage began to lapse, and that's clearly going to be an area that we are spending a lot of time on as we look at 2027, although it may be a more of a first half versus the second half headwind. As it relates to fuel, as we mentioned on the last call, our fuel cost, part of it is hedged, part of it, we have contracted transportation costs. So while year-on-year, it has increased, we have been able to manage that either through the contracts or through the rates that we've had with our transportation providers.

Operator: Our next question will come from the line of Scott Marks from Jefferies.

Scott Marks: First thing I wanted to ask about, you called out some of the continuing pressures in the space and that it's the pace of improvement with Nature's Own has taken a little bit longer. Some of your innovation hasn't kept up with trends in the category and understand those are a bit of a longer-term benefit. So as we think about the year now, how are you thinking about maybe stemming some of the pressures within your own business? I know you called out extensive cost controls. Just wondering if you can give us a sense of how you plan to approach that and how we should be thinking about those levers.

A. McMullian: Yes, sure. So we're already pulling some of those levers we have -- we're estimating roughly a $20 million cost takeout for this year to directly address that issue. There are opportunities improvement -- for improvement in procurement. There are also opportunities for additional efficiencies in the bakeries. We're always working on that in terms of greater productivity out of the bakeries, controlling our stale. I mean these are the basic, Scott, these are the basic blocking and tackling everyday tactical items that the team works on to combat some of the headwinds we face. More importantly, though, is the focus on getting our branded volumes stabilized. So again, back to those portfolio gaps that we're actively filling.

The relaunch of the small loaves, which, by the way, also benefits from the halo, if you will, of the Nature's Own advertising campaign, they're the same formulation, clean label, non-GMO. We'll get the halo effect of that. Those have just relaunched. It's only been a few weeks, but we're already seeing some very promising returns on that, that give us confidence that we can recapture our fair share of that segment. And then with regard to the broader Nature's Own franchise, since the relaunch, we have seen sequentially improving share trends across the Nature's Own franchise.

The traditional loaf, which has been the weakest part of the overall segment of the category, continues to lag behind, but even it has shown some sequential improvement. So we're not getting the results as fast as we had hoped that we would. But nevertheless, we are seeing those green shoots of improvement that give us confidence that this is the right strategy, the right path forward. Our customers are excited about it. They're telling us that when we joined them for meetings. And of course, when you've got your customers behind something, that's a really good early sign that you're doing the right thing. And then DKB, Jim asked the question a minute ago about price.

I do think there is some price sensitivity with DKB, but it's a lot more than that, too. I mean, as recently as Q1, DKB was up in units. This is a very recent phenomenon that has occurred. And frankly, our overall share has been very stable over the last few years until very recently. And I can draw a direct line between that, what's happened with share and the changes in consumer preferences, which we're actively working to address.

Scott Marks: Understood. Appreciate all the color there. And then maybe secondly for me, there was a comment in the prepared remarks about working with bank partners to ensure financial flexibility for next year. So wondering if you can just give us an update on your thinking around capital allocation, including the dividend as well as capital expenditures going forward.

Diego Scaglione: Yes, no worries. So first off, I just wanted to reiterate, we remain in compliance with all covenants and have very strong relationships with our bank group. That being said, we want to provide the company with the most flexibility as we continue to face a potentially challenging environment in the year ahead from a commodity standpoint, category standpoint, consumer standpoint. So while '27, we continue to work on and shape up from a planning perspective, we're building in that flexibility ahead of any potential constraints that could arise, and we expect to have an update on that front before year-end.

To answer your question on the dividend, in particular, clearly, the dividend is an important topic in shareholder consideration, and our Board reviews that policy each and every quarter. We share with them the relevant items across a number of dimensions, including cash generation, our leverage profile, capital investment. They take those elements into consideration when forming the basis of their actions, and we expect to announce any decision that the Board takes in our normal cadence after next week's Board meeting.

Operator: And our next question will come from the line of Steve Powers from Deutsche Bank.

Stephen Robert Powers: So I guess you've emphasized the difficult category backdrop. But obviously, there's a share component, too. I guess can you maybe just, love a little bit more thought or a little bit of thoughts from you, as to how you're thinking about that, that decomposition between the category itself and what Flowers specifically controls through better execution, better assortment, et cetera. Just trying to get a better sense of how you're seeing those 2 different drivers and how much control you really think you have over the trajectory of the business into '27 just relative to category momentum?

A. McMullian: Yes. Good question, Steve. Thank you for that. So obviously, the overall category remains weak. So we start with that. Category is down almost, I think, almost 3% in units in the quarter. And then as you start to decompose that, as we have been saying, traditional loaf, 20-ounce traditional loaf remains the weakest part of the sector. And obviously, we are very concentrated in traditional loaf. So getting that stabilized, as we've been saying for several quarters now, is priority #1. Hence, the Nature's Own relaunch, the move to cleaner label, the move to non-GMO, we believe these are the right things to do for the consumer, our customers and our company.

And we are beginning to see some results there. As I said, DKB is a more recent phenomenon in terms of the unit pressure, several reasons for that, some of the price sensitivity, but there's also consumption issues there, too. DKB indexes the highest among high-income consumers. They are also the ones that use GLP-1s the most. And so not terribly surprising to see a bit of pressure there. DKB continues to hold up better with the lower-income consumers than it is with the high-income consumers. I attribute a lot of that to the GLP-1 drugs.

But we have actions to address that, Steve, in terms of innovation, protein items, filling the gap that we have in terms of sourdough has also been an issue for DKB. We have sourdough in DKB only in California, and it's growing very, very well in California. So we have great confidence that, that is going to be a very important addition to that part of the portfolio. But back to the 20-ounce loaf, very important to get that stabilized. While we're working on that, the relaunch of the half loaves to pick up our fair share of that and to help stabilize the overall volumes is also an important part of the picture.

But also remember that we're not just a traditional loaf business, we have a very large $1 billion foodservice business, and we also serve private label. And so in the meantime, while we're working to rebuild this branded business, we are aggressively filling volumes with new wins in foodservice and private label in addition to wins for our branded business because that will help mitigate some of the operating deleverage that we've been experiencing.

Stephen Robert Powers: Okay. Very good. And then, Anthony, you talked about the difficult cost environment, particularly looking out to the first half of next year and a lot of the initiatives that Ryals just spoke to are going to take some time to have some return in terms of volume impact. I guess without asking for guidance, I'm just -- I'm curious as to how you're seeing the first half relative to where you've positioned the fourth quarter. Is the fourth quarter a reasonable run rate to talk about the starting point of '27? Or is the fourth quarter going to be a trough and we'll start to see improvement as the new year begins?

Just a question of trajectory of improvement off what hopefully is a bottom here in the back half of '26.

Diego Scaglione: Yes. It's a great question, Steve. I think that from an inflationary standpoint, many of the commodities that we're exposed to, we're seeing that increase in price right now in Q4. So sequentially, assuming there's not a significant shift in geopolitical or something like that, we're expecting that pressure to continue as we think about the first half of next year and looking at it through the lens of first half versus second half. Sitting here a couple weeks ago, a couple of months ago, it looked like wheat was really starting to rally. That has come down as we look at all the data that's out there that we can take into consideration, it looks like there's more acreage.

It looks like the geopolitical, there's softening there. So there's good indicators that there could be some relief from an inflationary standpoint. But I would say that's probably more of a second half just given our hedging programs, given where pricing is more of a second half versus a first half relief. So we're expecting continued pressures in the first half of next year as it relates to the inflationary side.

Operator: Our next question will come from the line of Max Gumport from BNP Paribas.

Max Andrew Gumport: I wanted to turn back to the balance sheet conversation. I'm really just trying to get a sense for how you're feeling about the health of your balance sheet. So obviously, you took decisive action earlier this year by cutting the dividend, which I think was a good step. But given your updated outlook for '26 and the operating conditions that you expect to persist into '27, it feels like you've found yourself a bit stretched again from a leverage perspective. I mean your second half EBITDA this year would imply a very high leverage ratio above your covenant. You included commentary in your remarks about proactively working with your bank partners to ensure you have ample financial flexibility.

You also in the 10-Q had a comment about seeking an amendment on the covenants attached to your debt. So just trying to get a sense for how comfortable do you feel with your balance sheet? And how do you think about getting yourself out of this leverage situation?

Diego Scaglione: Yes, it's a great question. As I mentioned earlier, we're working with our lead banks and again, expect to have an update by year-end, and we're highly confident based on the conversations and discussions to date that we will be able to put in place additional relief, specifically addressing what we see as potentially a concern in 2027 as it relates to our covenants. And those conversations are progressing well. We also have actions we can take. We're looking at our CapEx. We're looking at the investment in the business. You mentioned the dividend. We're looking at the dividend. These are all things that we take into consideration, recognizing the dividend is a Board action with management input.

So I want to make sure that as we look at 2027 and as you recognize some of the challenges from an inflationary standpoint, we're doing everything to try to look at it through the lens of how do we deleverage over time, how do we continue to have the capacity to invest in the business to support our brands, recognizing that there's going to be some cost pressures that we're going to need to deal with, and we are addressing that proactively through these conversations with our banks and proactively through some of the levers that we will pull in '27 as it relates to investments and costs.

Max Andrew Gumport: Great. And as a follow-up on that, I mean, you did mention that you are still investing for growth. So I guess what's giving you the confidence that you can do both at once that you can delever while also invest to try to drive the top line, whether it's advancing innovation or pursuing new business or investing more in your leading brands? Why do you think you're capable of doing both at once? And why not just focus entirely on the balance sheet, given where you're at currently?

Diego Scaglione: Yes. I think at the end of the day, we need to continue to invest in these businesses. Over time, that's going to provide the best opportunity from a top line perspective for us to recapture share to recapture growth. And we have to balance that investment with the returns and with the cadence of the deleveraging. So it's a profile that we remain cognizant of, and we're balancing that across multiple dimensions.

But to think that we would just pull back on those investments in the short term, we have to look at this as a multi-quarter, multiyear journey and be balanced in the approach, and we feel confident that the way that we're going to approach it is a balanced approach.

Operator: Next question will come from the line of Mitchell Pinheiro from Sturdivant.

Mitchell Pinheiro: So foodservice sales and volume, I guess, were up in the quarter, I think I read. So how does that -- how do you put that against a weak category growth that had trends like beyond just your traditional loaf weakness and you have the GLP-1 pressure. So what -- is the foodservice business a function of having the right customers? Or I would just love your comments around that.

A. McMullian: Yes, Mitch, a lot of the growth in foodservice is new business wins. We've reorganized our sales force with foodservice. We have mostly an internal sales force now, which has been a huge benefit for us. And so the team has done a great job at securing new business, expanding business with current customers as well has also been a part of that.

Mitchell Pinheiro: And then moving to -- your promotional activity was up. It didn't really move the volumes. Is that because the promotional activity is on your newer and smaller products -- smaller product lines, I should say?

A. McMullian: No, no, it's not so much that, Mitch. It's really -- I mean, remember that, first of all, the base sales in this category are very, very high. So getting lifts from promotional activity has always been a fairly difficult task. I would describe the effectiveness of our promotions in the quarter as uneven. So we had some that were more effective than others is the way that I would frame it. Some of our activity in the mass channel, for example, was not as successful as our activity with more traditional grocers.

And some of that just has to do with the overall price point so that in mass, for example, the promoted price maybe isn't low enough to drive enough volume. So again, as I was addressing one of the first questions on the call, I said we're taking a hard look at our promotional effectiveness. I think we can do an even better job going forward. And then, of course, when you look at DKB in the quarter, obviously, was a disappointment to us, but I would also call out that we were very heavy on promotion in the third quarter of last year and not as heavy this year.

And so that also contributed to some of the -- what I would describe as unexpected unit declines in the quarter. So it's more uneven than across the board, promotions aren't working. That's not the case.

Operator: And this concludes the question-and-answer session. I would now like to turn it back over to Ryals McMullian, Chairman and CEO, for closing remarks.

A. McMullian: Victor, thanks. I just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company. And as always, we look forward to speaking with you next quarter. Take care.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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