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Buyouts Aids Flowers Foods (FLO), Soft Branded Retail Unit Hurts

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Flowers Foods, Inc. (FLO - Free Report) is benefiting from focus on strategic acquisitions. Moreover, strength in the company’s strategic priorities has been yielding. Also, the company is committed toward cost-saving endeavors like Project Centennial. That being said, softness in branded retail and store branded retail categories are a concern. Let’s delve deeper.

Acquisitions: Key Driver

Flowers Foods has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. Recently, the company purchased the assets of Koffee Kup Bakery, Inc. in Burlington, VT. Management believes that the buyout expands Flowers Foods’ presence in the key Northeast market. In December 2018, the company completed the acquisition of Canyon Bakehouse, which has helped Flowers Foods foray into the growing gluten-free bakery space. Well, the company has successfully integrated Canyon Bakehouse, which is yielding results. In 2015, the company bought Dave’s Killer Bread (“DKB”) and Alpine Valley Bread Company. With the acquisition of DKB, it got access to the Pacific Northwest market. Markedly, brands like DKB, Nature's Own and Canyon Bakehouse brands have been performing well.

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What Else is Driving Flowers Foods?

Flowers Foods is on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. To this end, the company intends to shift focus toward value-added branded retail products, which are anticipated to drive the top line and enhance margins. Also, the company expects its optimized portfolio to drive market share gains through innovation. The company's recent innovations including DKB and Nature’s Own Perfectly Crafted Rye breads, Nature’s Own Perfectly Crafted flatbreads as well as Wonder English muffins bode well.

Further, Flowers Foods is focused on optimizing supply chain, while enhancing efficiency and reducing costs. Moving to margins, the company’s brand-building efforts such as plans to shift a larger proportion of sales mix to branded retail are likely to boost margins. Management intends to remain committed toward making marketing investments, undertaking innovation and adopting smart M&A activities in line with its portfolio strategy.

We note that Flowers Foods is progressing well with Project Centennial, which has been yielding favorably. The plan is aimed at streamlining operations, fueling efficiencies, improving margins by curtailing cost, optimizing supply chain and making prudent investments to solidify the company’s competitive position, aid revenue growth as well as boost stockholders’ value. The project has propelled the company to evolve from sales and operations focused to a brand-focused packaged foods company. Project Centennial’s key priorities include curtailing costs, developing leading capabilities, reinvigorating core businesses and utilizing product adjacencies.

Roadblocks on the Way

During first-quarter fiscal 2021, Flowers Foods witnessed softness in branded retail and store branded retail categories. Notably, branded retail sales declined 3.3% year over year to $861.4 million mainly due to weak volume in cake as well as white and soft variety bread. Further, store branded retail sales declined 14.6% to $162.9 million mainly due to volume declines stemming from shift in consumers’ purchases to branded retail products. Such declines affected the company’s overall top line, which fell year over year and missed the Zacks Consensus Estimate. Sales decline was caused by reduced volumes to the tune of 6.9% owing to unfavorable year-over-year comparisons in most channels.

Management projects sales in the range of $4.23-$4.30 billion for fiscal 2021, suggesting a decline of about 3.5-2% year over year. This includes a 1.8% sales reduction owing to one less week in fiscal 2021.That being said, we believe that the aforementioned upsides are likely to help the company stay afloat amid such headwinds.

Shares of this Zacks Rank #3 (Hold) company have gained 9% so far this year compared with the industry’s 10.2% growth.

Some Solid Food Bets

Medifast, Inc. (MED - Free Report) , currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 12.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Darling Ingredients Inc. (DAR - Free Report) , currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 29.8%, on average.

Nomad Foods Limited (NOMD - Free Report) , currently carrying a Zacks Rank #2, has a trailing four-quarter earnings surprise of 10.3%, on average.

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