FLOWERS FOODS INC

Previous wording

The following discussion of the financial condition and results of operations of the company as of and for the twelve and twenty-eight weeks ended July 13, 2024 should be read in conjunction with the Form 10-K.

Current wording

The following discussion of the financial condition and results of operations of the company as of and for the twelve and forty weeks ended October 5, 2024 should be read in conjunction with the Form 10-K. Any reference to sales refers to net sales inclusive of allowances and deductions against gross sales.

Previous wording

Results of operations — an analysis of the company’s consolidated results of operations for the two comparative periods presented in our Condensed Consolidated Financial Statements.

Current wording

Results of operations — analyzes the company’s consolidated results of operations for the two comparative periods presented in our Condensed Consolidated Financial Statements.

Previous wording

Liquidity and capital resources — an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

Current wording

Liquidity and capital resources — analyzes cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

Previous wording

Additionally, detailed below are expense items affecting comparability that will provide greater context while reading this discussion:

Current wording

Additionally, detailed below are expense items affecting comparability that will provide greater context while reading this discussion. For more information regarding these items, see the reference to the Notes to Condensed Consolidated Financial Statements of this Form 10-Q as indicated in the table:

Previous wording

Business process improvement costs related to the transformation strategy initiatives In the second half of Fiscal 2020, we launched initiatives to transform our business, including upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our "bakery of the future" initiatives. Implementation of the ERP upgrade is anticipated to be completed in Fiscal 2026. These initiatives are further discussed in the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives, which was primarily consulting costs, are detailed in the table above and are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect costs (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) related to the upgrade of our ERP system to be approximately $25.0 million to $35.0 million for Fiscal 2024.

Current wording

Business process improvement costs related to the transformation strategy initiatives In the second half of Fiscal 2020, we launched initiatives to transform our business, including an upgrade to our information system, as well as investments in e-commerce, autonomous planning, and our "bakery of the future" initiatives. Implementation of the ERP upgrade is anticipated to be completed in Fiscal 2026. These initiatives are further discussed in the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives, which was primarily consulting costs, are detailed in the table above and are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income (Loss). We currently expect costs (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) related to the upgrade of our ERP system to be approximately $25.0 million to $30.0 million for Fiscal 2024.

Previous wording

Restructuring charges and related implementation costs In April 2024, the company announced a cost savings program to improve operational performance, which includes employee termination benefits associated with a reduction-in-force ("RIF") and other optimization initiatives. In the first and second quarters of Fiscal 2024, the company incurred $0.6 million and $6.8 million of RIF costs and made $0.2 million and $6.7 million of RIF payments, respectively. The RIF charges are included in the restructuring charges line item of the Condensed Consolidated Statements of Income. The company also incurred consulting costs associated with implementing the restructuring program in the first and second quarters of Fiscal 2024 and these costs are included in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income.

Current wording

Restructuring charges and related implementation costs In April 2024, the company announced a cost savings program to improve operational performance, which includes employee termination benefits associated with a reduction-in-force ("RIF") and other expense optimization initiatives. In the first and second quarters of Fiscal 2024, the company incurred $0.6 million and $6.8 million of RIF costs. The company made RIF payments of $0.2 million, $6.7 million, and $0.4 million in the first, second, and third quarters of Fiscal 2024, respectively. The RIF charges are included in the restructuring charges line item of the Condensed Consolidated Statements of Income (Loss). The company also incurred consulting costs associated with implementing the restructuring program in the first and second quarters of Fiscal 2024 and these costs are included in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income (Loss).

Previous wording

In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. As part of that restructuring, we incurred costs for employee termination benefits and other cash charges, which were primarily related to the voluntary employee separation incentive plan (the "VSIP"), RIF, and employee relocation costs. During the first quarter of Fiscal 2023, we recorded VSIP-related charges of $3.9 million and made VSIP-related payments of $0.5 million. Relocation costs incurred and paid during the first and second quarters of Fiscal 2023 were $0.3 million in each quarter. In the second quarter of Fiscal 2023, we recorded RIF and VSIP charges of $2.2 million and made payments of $2.9 million. These costs are recorded in the restructuring charges line item of the Condensed Consolidated Statements of Income. In the first quarter of Fiscal 2024, we paid the remaining VSIP payments of $1.4 million.

Current wording

In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. As part of that restructuring, we incurred costs for employee termination benefits and other cash charges, which were primarily related to the voluntary employee separation incentive plan (the "VSIP"), RIF, and employee relocation costs. During the first quarter of Fiscal 2023, we recorded VSIP-related charges of $3.9 million and made VSIP-related payments of $0.5 million. Relocation costs incurred and paid during the first, second, and third quarters of Fiscal 2023 were $0.3 million, $0.3 million, and $0.2 million, respectively. In the second quarter of Fiscal 2023, we recorded RIF and VSIP charges of $2.2 million and made payments of $2.9 million. These costs are recorded in the restructuring charges line item of the Condensed Consolidated Statements of Income (Loss). In the first quarter of Fiscal 2024, we paid the remaining VSIP payments of $1.4 million.

Previous wording

Impairment of assets During the second quarter of Fiscal 2024, the company recorded an asset impairment charge of $1.4 million to write-off certain cake distribution territories classified as held for sale that the company no longer intends to sell.

Current wording

Plant closure costs and impairment of assets On July 18, 2024, the company announced the closure of its Baton Rouge, Louisiana bakery. The bakery produced bun products and ceased production on September 19, 2024. This bakery closure is part of our strategy to optimize capacity within our supply chain. The facility continues to be used as a distribution center. The company recognized severance costs of $1.1 million and asset impairment and equipment relocation charges of $2.4 million in the third quarter of Fiscal 2024. Additionally, in the third quarter of Fiscal 2024, the company recorded a charge of $2.3 million to fully impair certain ERP-related software and recognized a recovery of $1.3 million related to the sale of equipment that had been previously written off in Fiscal 2022 as part of the Phoenix, Arizona bakery closure. During the second quarter of Fiscal 2024, the company recorded an asset impairment charge of $1.4 million to write-off certain cake distribution territories classified as held for sale that the company no longer intends to sell.

Previous wording

Acquisition-related costs On February 17, 2023, the company completed the acquisition of the Papa Pita bakery business ("Papa Pita") for total consideration of approximately $274.8 million, inclusive of a net working capital purchase price adjustment. We funded the purchase price with cash on-hand and from our existing credit facilities. Papa Pita is a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads with one production facility in West Jordan, Utah and, prior to the acquisition, Papa Pita co-manufactured certain products for us. Papa Pita has direct-store-delivery distribution in the western United States ("U.S."), expanding our geographic reach. We incurred additional acquisition costs during the twelve and twenty-eight weeks ended July 15, 2023 of $0.5 million and $3.7 million, respectively, and these costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income.

Current wording

Acquisition-related costs On February 17, 2023, the company completed the acquisition of the Papa Pita bakery business ("Papa Pita") for total consideration of $274.8 million, inclusive of a net working capital purchase price adjustment. We funded the purchase price with cash on-hand and from our existing credit facilities. Papa Pita is a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads with one production facility in West Jordan, Utah and, prior to the acquisition, Papa Pita co-manufactured certain products for us. Papa Pita has direct-store-delivery distribution in the western United States ("U.S."), expanding our geographic reach. We incurred additional acquisition costs during the forty weeks ended October 7, 2023 of $3.7 million, and these costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income (Loss).

Previous wording

Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. Our principal products include breads, buns, rolls, snack items, bagels, English muffins, and tortillas and are sold under a variety of brand names, including Nature’s Own, Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake, and Mrs. Freshley’s. Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization.

Current wording

Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake, and Mrs. Freshley’s. Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment.

Previous wording

Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth.

Current wording

Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe that executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization.

Previous wording

Our branded retail sales comprised 64.4% of total sales for the twenty-eight weeks ended July 13, 2024 as compared to 64.0% for the twenty-eight weeks ended July 15, 2023.

Current wording

Our branded retail sales comprised 64.3% of total sales for the forty weeks ended October 5, 2024 as compared to 64.1% for the forty weeks ended October 7, 2023.

Previous wording

As of July 13, 2024, we operated 46 bakeries, which produce fresh and frozen breads, buns, and rolls, as well as snack items, bagels, English muffins, and tortillas.

Current wording

As of October 5, 2024, we operated 45 bakeries, which produce fresh and frozen breads, buns, and rolls, as well as snack items, bagels, English muffins, and tortillas.

Previous wording

We continue to monitor the impact of a variety of factors on our business, including the impact of the inflationary economic environment on our business and consumers, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East. Our results through the second quarter of Fiscal 2024 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. However, inflationary pressures are impacting consumer purchasing patterns. Inflation, particularly for input costs, has also impacted our business during the previous two fiscal years which has partially offset the improved sales mix. We implemented price increases to mitigate these cost pressures during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023. Commodity cost inflation began to moderate in the latter half of Fiscal 2023 and we expect that trend to continue throughout the remainder of Fiscal 2024.

Current wording

We continue to monitor the impact of a variety of factors on our business, including the impact of the inflationary economic environment on our costs and the buying patterns of our consumers, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East. Our results through the third quarter of Fiscal 2024 continued to benefit from a more optimal sales mix of branded retail products as compared to pre-pandemic periods. However, inflationary pressures are impacting consumer purchasing patterns. Inflation, particularly for input costs, has also impacted our business during the previous two fiscal years which has partially offset the improved sales mix. We implemented price increases to mitigate these cost pressures during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023. Commodity cost inflation began to moderate in the latter half of Fiscal 2023 and we expect that trend to continue throughout the remainder of Fiscal 2024.

Previous wording

Additionally, in the prior year period, capacity constraints, largely for gluten-free production, resulted in lower production volumes and sales. These supply chain and other disruptions could continue to negatively impact production volumes as the global and U.S. supply chain remains uncertain. Although the conflict between Russia and Ukraine and the conflict in the Middle East have not impacted our operations directly, we are closely monitoring the impact of these conflicts on the broader economy including on the availability and price of commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and available workforce, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.

Current wording

Additionally, in the prior year period, capacity constraints, largely for gluten-free production, resulted in reduced production volumes and sales. These supply chain and other disruptions could continue to negatively impact production volumes as the global and U.S. supply chain remains uncertain. Although the conflict between Russia and Ukraine and the conflict in the Middle East have not impacted our operations directly, we are closely monitoring the impact on the broader economy including on the availability and price of commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and workforce availability, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.

Previous wording

Sales increased 1.4% for the twenty-eight weeks ended July 13, 2024 compared to the same period in the prior year, with price/mix contributing 2.1% and the Papa Pita acquisition contributing 0.3% (cycled on February 17, 2024), partially offset by volume declines of 1.0%. The benefits of inflation-driven pricing actions implemented predominantly in the prior year were partially offset by softer volumes. Volume declines were concentrated in the Other sales category, partly due to exiting certain lower margin business in the second half of Fiscal 2023, and were partially offset by growth in store branded retail volumes. Sales of DKBcontinued to increase on higher volumes, and sales of Nature's Ownimproved on positive price/mix, partially offset by lower volumes.

Current wording

Sales increased 0.8% for the forty weeks ended October 5, 2024 compared to the same period in the prior year. Price/mix contributed 2.0% and the Papa Pita acquisition contributed 0.2% (cycled on February 17, 2024), partially offset by volume declines of 1.4%. The benefits of inflation-driven pricing actions implemented predominantly in the prior year and optimizing our foodservice business were partially offset by softer volumes. Branded Retail volumes were relatively unchanged. Volume declines in the Other sales category largely resulted from exiting certain lower margin business in the second half of Fiscal 2023 and vending decreases, partially offset by growth in store branded retail volumes. DKBsales continued to increase due to higher volumes, and sales of Nature's Ownimproved on positive price/mix, partially offset by lower volumes.

Previous wording

For the twelve weeks ended July 13, 2024, income from operations was $95.2 million compared to $88.6 million in the prior year quarter. The improvement resulted from moderating input costs, and, to a lesser extent, lower distributor distribution fees, reduced marketing and consulting costs, and the prior year insurance liability claim. These benefits were partially offset by increased workforce-related costs, higher repairs and maintenance expenses, higher restructuring charges, greater outside purchases of product, and lower production volumes quarter over quarter.

Current wording

For the twelve weeks ended October 5, 2024, income from operations was $90.2 million compared to a $59.3 million loss from operations in the prior year quarter. The improvement resulted mostly from the prior year legal settlement and related costs and moderating input costs, and, to a lesser extent, benefits of optimizing our foodservice business, lower distributor distribution fees, reduced marketing investments, and decreased logistics and consulting costs. These benefits were partially offset by increased workforce-related costs, higher rent expenses, greater outside purchases of product, and lower production volumes quarter over quarter.

Previous wording

Income from operations was $196.8 million for the twenty-eight weeks ended July 13, 2024 compared to $182.3 million in the prior year period. The improvement mostly resulted from moderating input costs, improved sales price/mix, and lower distributor distribution fees. Those factors were partially offset by increased workforce-related costs, higher repairs and maintenance and rent expenses, higher depreciation expense, and lower production volumes (excluding the acquisition impact).

Current wording

Income from operations was $286.9 million for the forty weeks ended October 5, 2024 compared to $123.0 million in the prior year period. The improvement primarily resulted from the prior year legal settlement and related costs, as well as moderating input costs, improved sales price/mix, decreased distributor distribution fees, and lower consulting costs. Those factors were partially offset by increased plant closure costs and impairment of assets, greater workforce-related costs, higher rent expenses, increased depreciation expense, and lower production volumes (excluding the acquisition impact).

Previous wording

Net income for the twelve weeks ended July 13, 2024 was $67.0 million compared to $63.8 million in the prior year quarter. The improvement resulted primarily from the increase in income from operations, as described above, net of a higher effective tax rate quarter over quarter.

Current wording

Net income for the twelve weeks ended October 5, 2024 was $65.0 million compared to a net loss of $46.7 million in the prior year quarter. The improvement resulted primarily from the increase in income from operations, as described above, and a lower effective tax rate quarter over quarter.

Previous wording

Net income for the twenty-eight weeks ended July 13, 2024 was $140.0 million compared to $134.5 million in the prior year period. The growth year over year resulted primarily from the increase in income from operations, as described above, net of a higher effective tax rate in the current year period.

Current wording

Net income for the forty weeks ended October 5, 2024 was $205.0 million compared to $87.7 million in the prior year period. The year over year growth resulted primarily from the increase in income from operations, as described above, net of a higher effective tax rate in the current year period.

Previous wording

During the twenty-eight weeks ended July 13, 2024, we generated net cash flows from operations of $168.4 million, invested $61.3 million in capital expenditures, and increased our indebtedness by $20.0 million. Additionally, we paid $101.9 million in dividends to our shareholders and repurchased $22.7 million of company stock. On April 15, 2024, we amended the two-year $200.0 million accounts receivable repurchase facility (the "repurchase facility") to extend the scheduled facility expiration date to April 14, 2026. During the twenty-eight weeks ended July 15, 2023, we generated net cash flows from operations of $128.9 million, paid $274.8 million for the Papa Pita acquisition (inclusive of the net working capital purchase price adjustment), invested $68.4 million in capital expenditures, and increased our indebtedness $182.0 million primarily to fund the acquisition. Also, in the prior year period, we paid $98.1 million in dividends to our shareholders and repurchased $26.2 million of company stock.

Current wording

During the forty weeks ended October 5, 2024, we generated net cash flows from operations of $282.4 million, invested $86.6 million in capital expenditures, and increased our indebtedness by $5.0 million. Additionally, we paid $152.5 million in dividends to our shareholders and repurchased $22.7 million of company stock. On April 15, 2024, we amended the two-year $200.0 million accounts receivable repurchase facility (the "repurchase facility") to extend the scheduled facility expiration date to April 14, 2026. During the forty weeks ended October 7, 2023, we generated net cash flows from operations of $257.3 million, paid $274.8 million for the Papa Pita acquisition (inclusive of the net working capital purchase price adjustment), invested $97.0 million in capital expenditures, and increased our indebtedness $145.0 million primarily to fund the acquisition. Also, in the prior year period, we paid $146.7 million in dividends to our shareholders and repurchased $30.9 million of company stock.

Previous wording

Our ERP initiative, which includes upgrading our information system platform, is expected to improve data management and efficiencies while automating many of our processes. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020. In the first quarter of Fiscal 2021, we transitioned into the design phase and engaged a leading, global consulting firm to assist us in designing and implementing the upgrade of our ERP platform and to serve as the system integrator for the project. We transitioned into the build phase at the beginning of Fiscal 2022 and during the second quarter of Fiscal 2023, we began deploying the ERP upgrade. The deployment is anticipated to be completed in Fiscal 2026. We currently estimate total costs for the upgrade of our ERP system will be approximately $350 million (of which approximately 34% has been or is anticipated to be capitalized). As of July 13, 2024, we have incurred costs related to the project of approximately $226 million.

Current wording

Our ERP initiative, which includes upgrading our information system platform, is expected to improve data management and efficiencies while automating many of our processes. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020. In the first quarter of Fiscal 2021, we transitioned into the design phase and engaged a leading, global consulting firm to assist us in designing and implementing the upgrade of our ERP platform and to serve as the system integrator for the project. We transitioned into the build phase at the beginning of Fiscal 2022 and during the second quarter of Fiscal 2023, we began deploying the ERP upgrade. The deployment is anticipated to be completed in Fiscal 2026. We currently estimate total costs for the upgrade of our ERP system will be approximately $350 million (of which approximately 34% has been or is anticipated to be capitalized). In the third quarter of Fiscal 2024, we recorded a $2.3 million asset impairment charge to fully impair certain ERP-related assets that no longer meet our business needs. As of October 5, 2024, we have incurred costs related to the project of approximately $232 million.

Previous wording

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve and twenty-eight weeks ended July 13, 2024 and July 15, 2023, respectively, are set forth in the tables below (dollars in thousands):

Current wording

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve and forty weeks ended October 5, 2024 and October 7, 2023, respectively, are set forth in the tables below (dollars in thousands):

Previous wording

Sales decreased quarter over quarter due to softer volumes in the Other sales category, partially offset by overall favorable price/mix. Strategic exits of certain foodservice business in the second half of Fiscal 2023 drove the volume decrease, net of volume growth in store branded retail sales. To mitigate the impact of the inflationary pressure on consumer spending, we increased our promotional activity quarter over quarter, though it remained below pre-pandemic levels.

Current wording

Sales decreased quarter over quarter due to softer volumes in both sales categories, partially offset by overall favorable price/mix. Price/mix benefitted from executing our portfolio strategy in our non-retail business, net of negative price/mix for Branded Retail and store branded retail. To mitigate the impact of the inflationary pressure on consumer spending, we increased our promotional activity quarter over quarter, though it remained below pre-pandemic levels.

Previous wording

Branded retail sales increased 0.3% quarter over quarter due to favorable price/mix resulting from a shift in mix to more premium-priced products. Volume was consistent quarter over quarter as growth in branded organic products, traditional branded buns and rolls, and branded Keto products was offset by softer volumes primarily for branded traditional loaf breads and branded cake. Our DKBand Nature's Ownbrands continued to perform well benefiting from efficient market execution and growth in more recently introduced products, such as Nature's Own Keto products and DKBsnack bars and bites. Canyon Bakehouse'ssales grew quarter over quarter on positive price/mix and volume growth enabled by capacity additions.

Current wording

Branded retail sales decreased 1.5% quarter over quarter due to unfavorable price/mix, resulting from increased promotional activity, and volume declines. Branded cake drove the volume decrease, partially offset by volume growth in branded bread products. Branded bread products grew due to increases in branded organic products, branded traditional buns and rolls, and branded Keto products, partially offset by softness in branded traditional loaf breads. Our DKBand Nature's Ownbrands continued to perform well benefiting from efficient market execution and growth in newer products, such as Nature's Own Keto products. Canyon Bakehouse'ssales grew quarter over quarter on volume growth enabled by capacity additions, partially offset by negative price/mix.

Previous wording

Materials, supplies, labor and other production costs as a percent of sales decreased quarter over quarter due to moderating ingredient and packaging costs, improved sales price/mix, and decreased product returns. Lower production volumes, higher workforce-related and bakery maintenance costs, and increased outside purchases of product (sales with no associated ingredient costs), partially offset the overall improvement. Bakery maintenance costs and outside purchases of product are reflected in the Other line item in the table above. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour, fats and oils, and eggs, and packaging items including bags and corrugated containers. Wage inflation, higher employee compensation costs, and lower production volumes resulted in the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes and the competitive labor market to continue to negatively impact our operations.

Current wording

Materials, supplies, labor and other production costs as a percent of sales decreased quarter over quarter due to moderating ingredient and packaging costs, improved sales price/mix, and decreased product returns. Lower production volumes, higher workforce-related costs, and increased outside purchases of product (sales with no associated ingredient costs) partially offset the overall improvement. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour and fats and oils, partially offset by higher costs for other ingredients such as sweeteners. Wage inflation, higher employee compensation costs, and lower production volumes resulted in increased workforce-related costs as a percent of sales. We expect the impact of lower production volumes and the competitive labor market to continue to negatively impact our operations. Outside purchases of product are included in the Other line item in the table above.

Previous wording

Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2024. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the cost of these raw materials and significantly affect our earnings.

Current wording

Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2024. To manage the impact of volatility in certain raw material prices, we enter into forward purchase agreements and other financial instruments. Any decrease in the availability of these agreements and instruments could increase the cost of these raw materials and significantly affect our earnings.

Previous wording

Workforce-related costs increased as a percent of sales quarter over quarter primarily due to a shift from distributor distribution fees, wage inflation, higher employee compensation costs, and a competitive labor market. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and territory-related logistics costs, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The decrease in the Other line item mostly reflects decreased marketing investments and consulting costs and an insurance liability claim in the prior year period. These items were partially offset by increased amortization of cloud-based applications, higher rent expense, and lower scrap dough income. See the “Matters Affecting Comparability” section above for a discussion of the project-related consulting costs.

Current wording

Workforce-related costs increased as a percent of sales quarter over quarter primarily due to a shift from distributor distribution fees, wage inflation, and higher employee compensation costs, partially offset by benefits of cost savings programs. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and other territory-related costs such as vehicle rent expense, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The decrease in the Other line item mostly reflects the $136.7 million decrease in legal settlements and related costs and, to a much lesser extent, decreased marketing investments, reduced consulting costs, and lower transportation costs. These items were partially offset by higher rent expense and lower scrap dough income. See the “Matters Affecting Comparability” section above for a discussion of the legal settlement and related costs and the project-related consulting costs.

Previous wording

Income from operations for the twelve weeks ended July 13, 2024 increased as a percent of sales compared to the prior year quarter due primarily to moderating ingredient and packaging costs and lower distributor distribution fees, partially offset by higher workforce-related costs and restructuring charges and lower production volumes, as discussed above.

Current wording

Income from operations for the twelve weeks ended October 5, 2024 increased as a percent of sales compared to the prior year quarter primarily due to significantly lower selling, distribution, and administrative costs, as described above, moderating ingredient and packaging costs, and benefits from optimizing our foodservice business. Those items were partially offset by higher workforce-related costs, higher plant closure costs and impairment of assets, and lower production volumes.

Previous wording

The effective tax rate for the twelve weeks ended July 13, 2024 was 25.9% compared to 24.4% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to unfavorable discrete items related to state income taxes in the current year quarter. For both periods presented, the primary differences in the effective rate and statutory rate were state income taxes.

Current wording

The effective tax rate for the twelve weeks ended October 5, 2024 was 24.0% compared to 26.2% in the prior year quarter. The increased rate in the prior year quarter was due to a tax benefit associated with a pre-tax loss, coupled with other net discrete tax benefits, whereas the current year quarter rate resulted from tax expense associated with a pre-tax income, coupled with other net discrete tax benefits. For both periods presented, the primary differences in the effective rate and the statutory rate were state income taxes.

Previous wording

Sales increased year over year due to positive pricing actions implemented predominantly in the second quarter of the prior year which targeted branded retail sales, and, to a lesser extent, the Papa Pita acquisition contribution. Volume declines, largely for non-retail items and, to a lesser extent, for branded retail traditional loaf breads, partially offset the overall sales increase. Our promotional activity increased as compared to the prior year period due to inflationary pressure on consumer spending but remained lower than pre-pandemic levels.

Current wording

Sales increased year over year due to positive pricing actions implemented predominantly in the second quarter of the prior year that benefitted branded retail sales, improved price/mix for our non-retail business, and, to a lesser extent, the Papa Pita acquisition contribution. Volume declines in the Other sales category partially offset the overall sales increase and resulted from strategic exits of certain foodservice business in the second half of Fiscal 2023 and declines in vending volumes, net of increased volume for store branded retail sales. Our promotional activity increased as compared to the prior year period in response to inflationary pressure on consumer spending but remained below pre-pandemic levels.

Previous wording

Branded retail sales grew 2.1% year over year due to favorable price/mix, the acquisition contribution, and modest volume growth. Price/mix benefitted from inflation-driven pricing actions taken in the second quarter of the prior year and improved mix from greater branded organic product sales. The slight increase in volume resulted primarily from growth in our more differentiated products, such as branded organic and branded Keto, and from market share gains in branded traditional buns and rolls. The increases were mostly offset by softer volumes primarily for branded traditional loaf breads and branded cake. Our Nature's Ownand DKBbrands continued to perform well. DKB benefitted from inflation-driven price increases implemented in the prior year, efficient market execution, and growth from more recently introduced products, such as snack bars and bites. Nature's Ownbenefitted from inflation-driven price increases implemented in the prior year, and growth in Keto bread (introduced in Fiscal 2023) and Keto buns (introduced in the second quarter of Fiscal 2024), but experienced volume declines year over year largely due to inflationary pressure on consumer spending.

Current wording

Branded retail sales grew 1.0% year over year due to favorable price/mix and the acquisition contribution; volume was relatively unchanged. Price/mix benefitted from inflation-driven pricing actions taken in the second quarter of the prior year and improved price/mix from greater sales of our more differentiated branded products, such as branded organic and Keto. Decreases in branded cake volumes were partially offset by volume growth in branded bread products. Higher branded bread volumes resulted from increases in branded organic products, branded traditional buns and rolls, and branded Keto products, partially offset by softness in branded traditional loaf breads. Our Nature's Ownand DKBbrands continued to perform well. DKB benefitted from inflation-driven price increases implemented in the prior year, efficient market execution, and growth from more recently introduced products, such as snack bars and bites. Nature's Ownbenefitted from inflation-driven price increases implemented in the prior year, and growth in Keto bread (introduced in Fiscal 2023) and Keto buns (introduced in the second quarter of Fiscal 2024), but experienced volume declines year over year largely due to inflationary pressure on consumer spending.

Previous wording

Sales in the Other category increased 0.3% due to positive price/mix and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased largely due to volume growth in store branded traditional loaf breads, partially offset by negative price/mix. Non-retail sales decreased year over year due to volume declines, partially offset by positive price/mix and the acquisition contribution. Foodservice drove most of the volume decrease as we exited certain lower margin business in the second half of Fiscal 2023. Declines in vending also contributed to lower volumes.

Current wording

Sales in the Other category increased 0.4% due to positive price/mix, largely from optimizing our foodservice business, and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased mainly due to volume growth in store branded traditional loaf breads, partially offset by negative price/mix. Non-retail sales decreased year over year due to volume declines, partially offset by positive price/mix and the acquisition contribution. Foodservice drove most of the volume decrease as we exited certain lower margin business in the second half of Fiscal 2023. Declines in vending and thrift store sales also contributed to lower volumes.

Previous wording

We anticipate our Fiscal 2024 sales will be flat to higher than Fiscal 2023 sales due to price increases implemented in Fiscal 2023 and new business coming online in the second half of Fiscal 2024, however, this benefit could be offset by changes in consumer buying patterns, changes in promotional activity, and the impact of cycling certain exits of lower margin business that occurred in Fiscal 2023 and to a lesser extent in Fiscal 2024.

Current wording

We anticipate our Fiscal 2024 sales will be flat to higher than Fiscal 2023 sales due to price increases implemented in Fiscal 2023 and new business that has or will come online in the second half of Fiscal 2024, however, this benefit could be offset by changes in consumer buying patterns, changes in promotional activity, and the impact of cycling certain exits of lower margin business that occurred in Fiscal 2023 and to a lesser extent in Fiscal 2024.

Previous wording

Materials, supplies, labor and other production costs as a percent of sales decreased year over year due to moderating ingredient and packaging costs, improved sales price/mix, and decreased product returns. Lower production volumes (excluding the acquisition impact), higher workforce-related costs, and increased bakery maintenance costs, reflected in the Other line item, partially offset the overall improvement. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour, fats and oils, and eggs, and packaging items including bags and corrugated containers. Wage inflation, higher employee compensation costs, and lower production volumes drove the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes (excluding the acquisition impact) and the competitive labor market to continue to negatively impact our operations.

Current wording

Materials, supplies, labor and other production costs as a percent of sales decreased year over year due to moderating ingredient and packaging costs, improved sales price/mix, and decreased product returns. Lower production volumes (excluding the acquisition impact) and higher workforce-related costs partially offset the overall improvement. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour, fats and oils, and eggs, and packaging items including bags and corrugated containers. Higher costs for sweeteners partially offset the lower ingredient costs. Wage inflation, higher employee compensation costs, and lower production volumes drove the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes (excluding the acquisition impact) and the competitive labor market to continue to negatively impact our operations.

Previous wording

Workforce-related costs increased as a percent of sales year over year due to a shift from distributor distribution fees, higher employee compensation costs, wage inflation, and a competitive labor market. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and territory-related logistics costs, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The decrease in the Other line item mostly reflects reduced transportation and consulting costs and the prior year acquisition costs and insurance liability claim, partially offset by increased amortization of cloud-based applications, increased rent expense, and lower scrap dough income. See the “Matters Affecting Comparability” section above for a discussion of the project-related consulting costs and the acquisition-related costs.

Current wording

Workforce-related costs increased as a percent of sales year over year due to a shift from distributor distribution fees, higher employee compensation costs, wage inflation, and a competitive labor market. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and other territory-related costs, such as vehicle rent expense, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The decrease in the Other line item mostly reflects the $136.7 million decrease in legal settlements and related costs and, to a much lesser extent, reduced transportation and consulting costs and the prior year acquisition costs and insurance liability claim.

Previous wording

Year over year, depreciation and amortization expense increased in dollars and as a percent of sales primarily due to the ERP assets being placed in service in the second quarter of Fiscal 2023 and, to a lesser extent, the Papa Pita assets acquired midway through the first quarter of Fiscal 2023, partially offset by assets becoming fully depreciated.

Current wording

Year over year, depreciation and amortization expense increased in dollars and as a percent of sales primarily due to the ERP assets being placed in service in the second quarter of Fiscal 2023 and, to a lesser extent, other capital projects being placed in service and the Papa Pita assets acquired midway through the first quarter of Fiscal 2023.

Previous wording

Income from operations increased as a percent of sales compared to the prior year period primarily due to moderating input costs, partially offset by lower production volumes (excluding the acquisition impact), the current year asset impairment charges, increased selling, distribution, and administrative expenses, and increased depreciation and amortization expense.

Current wording

Income from operations increased as a percent of sales compared to the prior year period primarily due to significantly lower selling, distribution, and administrative costs, as described above, moderating input costs, improved sales price/mix, partially offset by increased plant closure costs and impairment of assets, lower production volumes (excluding the acquisition impact), and higher depreciation expense.

Previous wording

The effective tax rate for the twenty-eight weeks ended July 13, 2024 was 24.9% compared to 22.9% in the prior year period. The increase in the rate was primarily due to unfavorable discrete items related to state income taxes in the current year, coupled with a decrease in benefits on stock-based compensation. For both periods presented, the primary differences in the effective rate and statutory rate were state income taxes including the recognition of discrete tax credits.

Current wording

The effective tax rate for the forty weeks ended October 5, 2024 was 24.6% compared to 21.0% in the prior year period. The increase in the rate was primarily due to unfavorable discrete items related to state income taxes in the current year, coupled with a decrease in benefits on stock-based compensation. For both periods presented, the primary differences in the effective rate and statutory rate were state income taxes including the recognition of discrete tax credits.

Previous wording

The increase in comprehensive income year over year resulted primarily from increased net earnings, net of changes in the fair value of derivatives.

Current wording

The increase in comprehensive income year over year resulted primarily from increased net income.