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Flowers Foods' (FLO) Core Strategies Aid, Costs Flare Up

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Flowers Foods, Inc. (FLO - Free Report) is benefiting from its core priorities. Efficient pricing as well as recovery in the foodservice channel are also aiding the company. Despite encountering cost-related challenges, management raised its earnings per share (EPS) guidance for fiscal 2021, which, however, suggests a decline from the year-ago period.

The Zacks Consensus Estimate for fiscal 2021 EPS has moved 1.7% north over the past 30 days to $1.19. Let’s take a closer look at all the above-mentioned aspects.

Flowers Foods, Inc. Price, Consensus and EPS Surprise

Flowers Foods, Inc. Price, Consensus and EPS Surprise

Flowers Foods, Inc. price-consensus-eps-surprise-chart | Flowers Foods, Inc. Quote

What’s Working Well for Flowers Foods?

The company has been on track with its core priorities, which include developing the team, concentrating on brands, prioritizing margins, and looking out for prudent mergers and acquisitions. To this end, management has been shifting focus toward value-added branded retail products, which are aimed at aiding its top-line growth and enhancing margins. Branded-retail sales, which were the company’s most profitable segment in the second quarter of fiscal 2021, formed 66.3% of its total sales, compared with 66.1% in the preceding quarter and 60% in the same quarter in 2019.

Apart from this, the company anticipates its optimized portfolio to drive market share gains through innovation. The company’s bread category has been benefiting from strength in brands like Dave’s Killer Bread (DKB), Canyon Bakehouse, and Nature’s Own Perfectly Crafted. The company is focused on undertaking innovation in its leading brands, which is likely to aid growth. Moving to margins, the company’s brand-building efforts such as plans to shift a larger proportion of sales mix to branded retail are aiding margin performance. The company is on track to achieve $30-$40 million in portfolio optimization savings through 2021. Finally, management intends to be committed toward making marketing investments, undertaking innovation and go for smart M&A activities, in line with its portfolio strategy.

Although Flowers Foods’ sales declined year over year during the fiscal second quarter, it received partial respite from price/mix. The price/mix increased 3.1% during the quarter on the back of better pricing, which, in turn, was driven by efficient promotional activity. Another factor aiding Flowers Foods’ top line was strength in non-retail and other sales, which jumped 9.9% to $211.5 million during the second quarter of fiscal 2021. This was backed by an enhanced price/mix. Management stated that the rebound in the Foodservice channel was especially worth noting. With things opening up and consumers moving out, these trends are likely to continue working well for non-retail and other sales.

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Factors Obstructing Growth

Flowers Foods is seeing elevated costs, which weighed on its adjusted EBITDA margin in the fiscal second quarter. During the quarter, materials, labor, supplies and other production expenses (excluding depreciation and amortization), as a percentage of sales, expanded 20 basis points (bps) year over year to 49.5%. This upswing can be attributed to the moderating sales as well as higher returns of unsold products. The company saw increased commodity costs, which eroded the gross margin. Management expects to see considerable cost inflation in the near term, which might flare up in 2022 if the current commodity price levels prevail. Management, on its second-quarter earnings call, spoke about the currently challenging labor market, which, we believe, will escalate the company’s cost burden.

The adjusted selling, distribution and administrative (SD&A) costs, as a percentage of sales, flared up 30 bps to 38.4% on account of escalated logistic costs and marketing investments, partially offset by reduced distributor distribution fees. The adjusted EBITDA slipped 5% to $122.1 million and the adjusted EBITDA margin contracted 50 bps to 12%. While Flowers Foods is undertaking pricing actions to counter the cost inflation, it might not be enough to completely offset the same.

Wrapping Up

Although sales and earnings declined year over year in the fiscal second quarter, results remained above the pre-pandemic levels and management is confident about the company’s future potential, thanks to its four strategic pillars. Management remained impressed with its second-quarter performance, which was powered by the company’s leading brands and continued investments toward enhancing sales and optimizing network.

The EPS is now envisioned in the range of $1.17-$1.22, up from the prior projection of $1.10-$1.17. The guidance includes an effect of nearly 2 cents from one fewer week in fiscal 2021.  The company posted adjusted earnings per share of $1.31 in fiscal 2020. Management also raised the lower end of its fiscal 2021 sales guidance. The company now projects sales in the range of $4.256- $4.300 billion, which, however, suggests a 2-3% year-over-year decline. This guidance includes a 1.8% sales reduction due to one less week in fiscal 2021.

Shares of the Zacks Rank #3 (Hold) company have dipped 1.8% in the past three months compared with the industry’s decline of 4.6%.

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