This conference is being recorded. I will now turn the call over to J.T. Rieck, Treasurer and Vice President of Investor Relations. You may begin.
Thank you, Paulette. Good morning, everyone. Our third quarter results were released yesterday evening. The earnings release and our quarterly slide presentation is posted in the investors section of the Flowers Foods website. Our 10-Q was filed with the SEC yesterday evening as well. Before we begin, please be aware that our discussion today may include forward-looking statements about our company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. With that, I'll make some introductions. Participating on the call today, we have Ryals McMullian, Flowers Foods President and Chief Executive Officer, and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Ryals, I'll turn the call over to you.
Thanks, J.T. Good morning and welcome to our third quarter call. We're very happy today to report record sales ahead of our forecast and to reiterate our outlook for fiscal 2019 adjusted EPS. Regarding our four strategic pillars, focusing on our brands, prioritizing margin, pursuing smart M&A, and developing our team, we're pleased to see good momentum in several of them. The DKB and Canyon acquisitions have been resounding successes, and although it's harder to see from a quantitative standpoint, we are doing some great things for the development of our team. As we said in yesterday's release, we are still facing some margin headwinds.
After five months as CEO, I've had the opportunity to assess where we are and what we need to do to improve our profitability while maintaining the great top-line momentum we've enjoyed this year. I'm looking forward to sharing that with you on the call today. However, before I do that, and like we did last quarter, I want to call on Steve Kinsey first to review the financial results and give our outlook for the remainder of the year to set the context for what we'll talk about in a few minutes. Of course, we'll take your questions. Steve?
Thank you, Ryals, and good morning, everyone. In the third quarter, we continued to experience solid performance on the top line, driven primarily by sales in the retail channel. Consolidated sales increased to $43.1 million, or 4.7% year-over-year. Canyon Bakehouse, acquired in late 2018, contributed 2.2%. In the base business, improved price mix drove 2.1% of the sales increase, while higher volumes benefited the top line by 40 basis points. Price realizations improved across most of our channels and product classes, which has helped to partially offset the commodity labor and transportation cost increases we've experienced in recent quarters. Overall volume performance in our key brands and store brands was strong. However, we did see lower volumes of food service and store-branded cake and breakfast items. Looking at sales by channel, branded retail sales increased $36.7 million, or 6.7%.
Canyon Bakehouse's branded products accounted for slightly less than half of these incremental sales dollars. The balance was largely driven by continued growth from Dave's Killer Bread and Nature's Own, and Sun-Maid breakfast breads, which were introduced in the third quarter of last year. Branded retail cake was flat as compared to the prior year. Store-branded retail sales increased $12.1 million or 8.7%. Slightly less than half of the sales increase is attributed to the acquired Canyon Bakehouse store brand business. The balance of the growth was split between improved pricing mix and volume growth in store brand bread, buns, and rolls due to increased distribution with existing customers, offset by lower volumes in our store-branded breakfast business. Food service and other non-recent retail sales decreased by $5.7 million or 2.4%.
Lower volumes drove most of decline due in part to lost business from the inferior yeast disruption in 2018 and volume losses in the vending channel of our non-retail cake business. As we lap these prior events, we expect our food service and non-retail business to stabilize. In the quarter, gross margin decreased 10 basis points to 47.3% of sales. Improved price realizations did somewhat help to offset input cost inflation to some extent. However, the benefit of these pricing actions was offset by higher workforce costs and lower manufacturing efficiencies. Third quarter gross margins were also temporarily impacted by start-up costs related to the introduction of a new product line in one of our bakeries. Excluding the items affecting comparability, detailed in the press release, adjusted SD&A expenses increased 60 basis points as a percentage of sales, primarily due to the timing of employee incentives and increased marketing costs.
These items were partially offset by lower distributor distribution fees, which decreased 30 basis points as a percentage of sales and stabilizing logistic costs as a percentage of sales. GAAP diluted EPS for the quarter was $0.20 per share. Excluding the items affecting comparability, detailed in the release, adjusted diluted EPS in the quarter was $0.22 per share, down $0.01 compared to the prior year. Higher sales were largely offset by elevated labor costs, higher marketing expenses, and reduced manufacturing efficiencies. Canyon Bakehouse was accretive to both EBITDA and EPS in the quarter. Shifting to leverage and cash flow, just a few comments. Looking year-to-date, we've generated operating cash flows of $278.1 million and made capital expenditures of $70.6 million. Accordingly, cash flows year-to-date have been solid, and we paid $119.8 million in dividends to shareholders and reduced our total indebtedness by $102.5 million.
At quarter end, our net debt and trailing 12-month adjusted EBITDA stood at approximately 2.1 times. Turning to guidance. For the remainder of fiscal 2019, we expect good top-line momentum. We are increasing our outlook for full-year sales growth to be in the range of 4%-4.5%. This includes sales from the acquisition of Canyon Bakehouse, which now anticipated to be in the range of $75 million-$80 million, accounting for approximately 2% of the total 2019 sales growth. We expect base business growth to be driven by improvements in price mix, partially offset by a conservative view on volumes due to broader category softness. We continue to expect adjusted EPS in the range of $0.94-$0.99 per share.
The pricing actions we've taken have helped to mitigate input cost inflation, but we expect the margins will continue to be pressured as we work through manufacturing inefficiencies and higher workforce costs because of the tight labor market. We are pleased that Canyon Bakehouse is performing at the upper end of our plan, and we now see it being slightly accretive to full-year EPS. Now I'll turn the call back to Ryals.
Thank you, Steve. Look, although there were some issues that affected the quarter, the underlying fundamentals of the business are strong. We've got a solid foundation to build upon, and while there are certainly areas for improvement, I believe the trajectory of the business is quite positive. Our branded retail business is thriving, and we believe this is largely attributable to the org changes put in place a couple of years ago and the resulting focus and higher marketing support for our high-potential national brands. Nature's Own, Dave's Killer Bread, Wonder, all are significantly driving our top line, and all three gained unit and dollar share in the quarter as they have each quarter this year.
In the third quarter, DKB became the number two specialty loaf in retail dollars. Canyon Bakehouse became the number one gluten-free bread brand in the country, and it continues to grow in distribution and velocity. Furthermore, our focus on omni-channel is starting to pay off. In fact, syndicated data shows us that e-commerce sales of fresh packaged breads, buns, and rolls have almost doubled in the last year. Our branded sales have increased by 55%. That's still a relatively small base. Establishing a presence for our brands on the digital shelf is critical for growth in the future as more households buy groceries online and home delivery expands. Now, having said that, we recognize there's room for improvement. We still have work to do to improve our margin performance.
Over the past several months, I've taken the time to evaluate our current situation and challenge our senior leadership team. Working collaboratively, we've honed our focus around the issues we face. We've better framed the questions we need to be asking ourselves and focused on the development of a solid plan of action, all within the context of our four strategic pillars. We've identified the three primary areas that we believe will drive the most meaningful margin improvement. One is portfolio and supply chain optimization. Look, we need to identify the optimal mix of products for Flowers so we can drive out complexity and determine the most efficient bakery and logistics footprint. Now, the other two areas I'll talk about in a minute certainly have independent scopes of opportunity, but they too will be informed by the halo of this portfolio and supply chain initiative.
It's no secret we've been challenged in the cake business. I believe that with the right level of focus on our cake brands, plus investments in automation, we can turn this business and bring it to more attractive levels of margin contribution. Third, stabilizing and growing our food service business. We're one of the largest suppliers of food service bakery products in the U.S., and we need to better leverage that scale, rebuild our lost business, and focus on our highest margin opportunities. With regard to portfolio and supply chain optimization, we've told you for a while now that the first stage of Centennial focused primarily on indirect costs and org structure, and that we'd be turning our attention to supply chain in the second stage. Well, we're now at that point, we're asking ourselves two fundamental strategic questions.
One, what's the optimal portfolio for Flowers that can promote margin accretive growth? Two, what's the correct network and resources required to support and grow that portfolio going forward? To answer these questions, we're undertaking a complete portfolio profitability review, along with the development of tools and capabilities that will allow us to make more informed strategic choices around things like assortment, pricing, distribution, innovation. It'll also help us more efficiently weed out unprofitable products or unprofitable accounts that contribute nothing but added cost and complexity. It will generate opportunities for supply chain and overhead optimization. The true crux of this effort is to drive out valueless complexity and improve our operational efficiencies. Now, we've certainly taken advantage of immediate opportunities to optimize our network. We've added organic capacity in the Northeast this year.
We announced the closing of our Opelika, Alabama bakery at the end of this year, and we installed a new high-speed bun line in Suwanee, Georgia. We also have plans in place to convert another existing Flowers bakery to organic production to support the growth of DKB, and that'll happen next year. I believe that a holistic approach that's centered around the optimization of the portfolio will generate more meaningful improvements over time. Before we formally launched this initiative, we did complete an internal review that began when I was COO. I wanted to be sure that we challenged and honed the questions we were trying to answer, so that when work began in earnest, we had a very tight focus scope of activities with clearly understood desired outcomes. The initial phase of this work has already begun, and it'll take several weeks to complete.
It's being directed by a dedicated internal team, and we have support from outside resources. It's our intention to have an update for you on where we are by our earnings call next February. With regard to the second area of focus, reinvigorating and investing in our cake business. Look, it's become clear to me that we have under-invested in our cake brands and operations for several years now. The recent production difficulties we experienced with that new product launch only served to shine a brighter light on it. We believe in the potential of the iconic Tastykake brand, and we'll be seeking to make smart investments to drive the brand forward. That means a renewed focus on consistent quality, service, distribution, and innovation. It also means investing in robotics and other automation tools to drive efficiencies and improve our quality.
Work on that initiative is already underway. Food service is our third area of focus. As you know, our food service business was challenged last year by the yeast disruption. We're now cycling that, but more importantly, we need to get our food service business growing again. It's an important and scaled part of our business, and I think that working to grow it smartly by winning good margin business and seeking out attractive M&A candidates that offer margin-accretive premium or artisan product lines will be beneficial. Within our four strategic pillars, we'll focus on these three areas with intensity, and I believe that over time, execution against all three will improve our bottom line performance. Moving on. M&A. M&A remains a key strategic priority, where we've had some recent success.
As we mentioned earlier, since we closed the deal last September, Canyon's grown from number 3 all the way to number 1. On the top line, it's performing at the upper end of our expectations, and it's beating our bottom-line targets. As the Canyon integration winds down, we're continuing to proactively seek strategic opportunities in areas of the store outside the traditional bread aisle, as well as different product segments where we believe we have the right to win. As you know, we play in a large category, M&A is expected to be a key driver to grow our business and pivot to higher margin and faster-growing categories within baked foods.
Finally, I firmly believe our most important strategic priority is developing our team members and making sure that our organization possesses the capabilities and tools to successfully execute on all the other priorities we've talked about today. At all levels of the organization, we're increasing communication, we're increasing engagement, we're aligning work schedules to better fit today's modern lifestyles, and we're clarifying career paths to attract the best candidates and improve retention. Also, we're increasing accountability and better aligning incentives to job responsibilities. Today, almost 30% of our employees have incentives that are directly tied to their role. Two years ago, that number was zero. I firmly believe that as we continue to link incentives with responsibilities at the functional level, execution against our priorities will improve. In summary, despite some continuing margin headwinds in a few discrete areas, the fundamentals of the business are strong.
The branded business continues to enjoy good growth. Our recent M&A successes continue to bring meaningful returns. Our cash flow and our balance sheet are strong, we've got a talented, loyal, and dedicated team that executes with excellence. It will take some patience and some time for us to realize the full benefits of our initiatives. If we can deliver against the three areas of focus I summarized for you today, we believe that we can not only continue to drive the top line, but also deliver the improved margin performance of which we're capable and that our shareholders expect. Now we'll turn to your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you do have a question, please press star then one on your touch tone phone. We have a question from Mitch Pinheiro from Stifel, Nicolaus & Company. Please go ahead, Mitch.
Hi, good morning.
Hey, Mitch.
First question is regarding phase 2 here of Project Centennial and the supply chain optimization. I know you said something, but I missed it in your remarks, how long is this review going to take? I would have thunk that phase 2 would have been planned out as phase 1's going along, now it seems like it's a discrete stop and then start. Then you have this phase 2 analysis and then phase 2 implementation. What's the timeline on that?
Mitch, the whole thing is kind of the next step in the evolution under Centennial, right? We had a lot of org changes that came about in the first phase that we wanted to make sure we got bedded down and all in place. All that, frankly, is settled out now. I think more importantly, Mitch Pinheiro, we've been thinking about this for a long time. You know this industry pretty well, and this is something you got to be pretty careful and deliberate about. We took quite a bit of time to do our internal reviews and frankly learned quite a bit. I mentioned in my prepared remarks that one of the reasons we did that is we wanted to come out on the other side of that internal review with a very detailed and tight scope of work, obviously, for economies.
We went through a lot of spend with Centennial that won't be repeated here. This is a much smaller scale. We wanted both our internal and our outside resources to be fully prepared going in on the front end so that we could keep that scope really tight, clearly understand what outcomes we were after, and then perform the formal work.
When you look at this, and you look at your portfolio profitability optimization, are we going to see sales being culled in a material way? Will it be a drag on revenue growth in a material way, I guess is the question.
Yeah. There's an element of SKU rationalization involved here. Obviously, I can't quantify that for you today. That'll come later on. It's much more than that. This is a much more holistic approach that is rooted in portfolio optimization, but it's also about the network, right? Making sure that we're operating as efficiently as possible. We'll have more details on it as we go through the process. I'm not ready to answer that today. There will be some element of SKU rationalization involved. That's probably pretty obvious.
Okay. When it comes to the tight labor as it affects efficiency, is that the inability to fill second shifts? Can you talk about that a little bit?
Yeah, Mitch, it's really turnover. Turnover has been the biggest problem. To address that, we're doing some short-term things, and then obviously the portfolio and supply chain network stuff is a little longer term. We're trying to do some creative things with scheduling. As a fresh perishable DSD business, we basically run every day. We don't have the luxury of building inventories and sort of having more predictable scheduling. We're doing some things with shifts to try to give people more certainty as to their schedule, more instances of consecutive days off, which is historically a rarity in our industry, and just overall trying to make it a more attractive place to work. Furthermore, we're moving back away in some of our plants from outsourced labor back to permanent labor to create more of that one team atmosphere.
We've done that in a couple bakeries so far, and I can't say that we've seen significant financial returns from that yet, but we have seen the turnover start to fall. Once that happens and takes hold, one would expect, once those folks are trained up for those manufacturing efficiencies, to start coming back up to historical levels.
Okay. All right. Well, thank you. I'll get back in the queue.
Thank you, Mitch.
We have no further questions at this time. That concludes the Q&A session. I will now turn the call over to Ryals McMullian for closing comments.
Well, we appreciate you joining our call today. Thanks for your interest in Flowers, and we look forward to speaking again in February. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.