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Flower Foods (FLO) Hurt by Weakness in Foodservice Business

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Increased social distancing, stay-at-home trends and other government restrictions amid the coronavirus outbreak are marring foodservice business of a number of food companies like Flowers Foods, Inc. (FLO - Free Report) . Apart from this, escalated cost burden is a concern for the company. Nevertheless, higher stay-at-home food demand provides a breather.

Let’s delve deeper.

Factors Hurting Flowers Foods’ Performance

Flowers Foods foodservice performance is under pressure due to social-distancing trends amid the pandemic. Coronavirus-induced stay-at-home trends and restrictions started to hurt foodservice results in mid-March. Incidentally, foodservice and other non-retail sales declined 14.7% in the third quarter of fiscal 2020 due to reduced volumes amid the pandemic. The company witnessed declines in most categories of its non-retail business, mainly food service, schools and other institutions.

During its fiscal third-quarter earnings call, management highlighted that sit-down, fast-casual-style foodservice business is recovering slowly. In fact, the company expressed uncertainties related to potential surge in COVID-19 cases. Also, the new pandemic-induced lockdowns in Europe is a concern. Apart from this, store-branded retail sales fell 9.5% stemming from consumers’ shift to more branded products.


 

Also, this Zacks Rank #4 (Sell) has been seeing higher costs for a while now. During fiscal third-quarter, adjusted selling, distribution and administrative expenses (as a percentage of sales) rose 50 basis points to 38%, courtesy of increased independent distribution fees stemming from shift in product mix. Also, the company’s workforce-related costs increased as employee-incentives rose owing to improved financial performance. Apart from these, management incurred $1.9 million of start-up expenses in relation to the ongoing conversion of its Lynchburg, VA, facility to an organic bakery.

Moreover, Flowers Foods operates in a highly-competitive bakery industry. We note that such intense competitive pressure may lead to loss of market share as well as decline in sales and operating margins.

Wrapping Up

Flowers Foods is gaining from burgeoning demand stemming from rising stay-at-home eating trend amid coronavirus. Also, favorable price/mix has been a driver. These factors drove the company’s third-quarter fiscal 2020 results. Further, management is optimistic about stay-at-home food demand. Also, the company’s supply-chain initiatives, product optimization and restructuring actions bode well amid this crisis.

That being said, let’s see if these upsides can help the company counter the aforementioned hurdles. Shares of Flowers Foods have lost 9.5% in the past three months compared with the industry’s decline of 0.4%.

Better Ranked Food Stocks

United Natural Foods (UNFI - Free Report) , with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 4.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Hain Celestial (HAIN - Free Report) , with a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 24.6%, on average.

Pilgrim’s Pride (PPC - Free Report) , with a Zacks Rank #2, has a long-term earnings growth rate of 2.6%.

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