Prepared remarks
Good day, and thank you for standing by. Welcome to the Flowers Foods Second Quarter 2026 Results Conference Call. Operator Instructions: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, 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 Ryals McMullian, Chairman and CEO; and Anthony Scaglione, our CFO. Ryals, 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 packaged 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 Nature's Own relaunch, new business wins and innovation initiatives build momentum, we expect them to support greater stability and improved 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.
Questions and answers
Operator Instructions: Our first question comes from the line of Steve Powers with Deutsche Bank.
Ryals, maybe we can pick up a bit where you left off in the intro. If I think about the implied performance in 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 I guess, a little bit of how quickly we should expect them to manifest over the remainder of the year?
Okay. 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 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's a little skewed. We expect some year-over-year declines in Q3, but then normalization for all the factors that Ryals mentioned related to the new business wins, reduced elasticities as we're lapping prior year pricing in Q4 and a bit of stabilization in Nature's Own from our marketing investments continuing 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 branded retail business and the other segment where I would expect those new business wins to exist. So maybe a little bit more color as to where you see — which side of the business you see more improvement? And then, yes, I'd love a little bit more color on what you're seeing with the Nature's Own relaunch and kind of reasons for optimism with that.
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 is 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 Nature's Own relaunch. 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 and other channels. 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.
Our next question comes from the line of Scott Marks with Jefferies.
First thing I wanted to ask about, you noted in the prepared remarks rising competition and 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 the pricing dynamics in the category and where you are? And any thoughts of changes to some of the actions you've taken to maintain maybe more competitiveness versus peers in traditional?
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. 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. 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: 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. My initial view 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 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 to help us frame your thinking.
Sure. 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'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 Ryals' 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 I 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 and is something that we need to definitely address as we look at '27 and the exit velocity coming out of '26. It's something we're working to address going forward. 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.
Our next question comes from the line of Jim Salera with Stephens.
I wanted to follow up on your commentary to Steve and 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. 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 could you 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?
Yes. Let me start on that, Jim. I would say, clearly, we have to look at productivity measures, which is part of our annual process and throughout the year we're looking at ways to be more efficient in the bakeries and across the network. We took action coming out of Q1 when we saw softness on the top line that will accrue as a tailwind as we exit 2026 into 2027. As we said in the prepared remarks, that's roughly around a $20 million tailwind we'll have going into 2027. The other area is going to be the price-pack architecture. As Ryals mentioned, we're bringing new products around small loaves, bringing to market innovation in sourdough — areas where the consumer has headed and where the consumer is 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 price probably is not going to be the only lever to overcome the inflation. A lot more work remains around that as we continue the '27 planning process.
My follow-up question is on Dave's Killer Bread. In the prepared remarks, you guys touched on marketing pullback there. I would just love some more commentary around — is that 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 there would be great.
Yes, Jim, it's temporary. It's the way we laid out the cadence of our marketing and promo spend this year. We focused a lot at the beginning of the year with — you may recall the Rock Your Reset campaign that we did with Dave's Killer Bread. And then also a focus on back-to-school. So we should see more normalized levels of promo and marketing spend with Dave's Killer Bread for the balance of the year.
Our next question comes from the line of Mitchell Pinheiro with Sturdivant & Co.
I was looking at your fresh bread volume decline, which was 9.5%, 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 can you — how do you manage that?
Mitch, clearly, price had a big contribution to price/mix. Given the volume decline, our pricing was a positive contributor to overall margin. As we look forward to the earlier comments, there are other variables that we're looking at for the balance of this year and into '27, including price-pack architecture, which I mentioned earlier. But price was definitely a contributing factor to answer your question.
And so sort of negative fixed asset leverage, you've been able to manage that? Or how should we think about that?
From the restructuring, we had some cost out in COGS. We've had good productivity within the bakery network. But clearly, labor and the bakery network are our highest fixed costs, and while we're looking at network optimization, that is more complicated and takes much longer to execute. We're constantly looking at ways to be more efficient within the four walls of our bakeries and our network, and that drove some benefit, but that becomes harder and harder with volume declines. So as you can imagine, that's something that we're looking at and continue to pursue ways to optimize going forward.
Okay. And then as you look at the third quarter, do you expect volume declines to moderate?
Yes, we don't break that out specifically. As I mentioned, we expect Q3 year-over-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 bit more stabilization as the new wins get more fully ramped. That's probably the most color I can give you in terms of the near term.
Okay. And then I guess two more questions. One with Dave's Killer Bread. You mentioned that consumer shifts in preferences helped pressure the unit volume decline. What are you referring to?
Mostly, we think that it's the growth of sourdough. It's pretty remarkable, actually. That subsegment of the category has already grown to be a $1.3 billion subcategory. So it's been pretty tremendous growth. In Dave's Killer Bread, we only have sourdough on the West Coast currently. But as we mentioned earlier in the innovation pipeline, we have products planned 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 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.
Okay. And then just final question is where do we stand with the comprehensive review? Where are we in that process? Are we close to the end? Is this a continuous improvement, comprehensive review? Can you shed a little light on that?
I think we're always in the mode of continuous improvement. In terms of the formal initiative of the comprehensive review, yes, 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, focus or better execution, are folded in and are the result of that comprehensive review.
And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Ryals McMullian for closing remarks.
Okay. 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.
This concludes today's conference. Thank you for your participation. You may now disconnect.