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3 Key Factors That Make Flowers Foods (FLO) a Delectable Stock

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Flowers Foods, Inc. (FLO - Free Report) is well-positioned courtesy of strength in its strategic priorities. The packaged bakery foods provider has strategically increased its presence through acquisitions to grow its portfolio. In addition, the company’s effective pricing actions are worth mentioning.

Let’s discuss this in detail.

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Strategic Priorities on Track

Flowers Foods has been on track with its core priorities, including developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. To this end, management has been shifting focus toward becoming a more brand-focused company. On its last earnings call, management highlighted that its household penetration improved significantly in the past two years. Compared with 2019 levels, its household penetration and repeat rates were up 300 basis points and 270 basis points, respectively. The company also anticipates its optimized portfolio to drive market share gains through innovation. The company is focused on undertaking innovation in its leading brands, which is likely to drive growth.

Moving to margins, the company’s brand-building efforts, such as plans to shift a larger proportion of sales mix to branded retail, have been aiding margin performance. During 2020 and 2021, the company’s portfolio optimization programs saved $60 million. The company is on track with incremental cost-saving measures, primarily across operational efficiencies and procurement for 2022. Management expects such programs to generate an additional $25-$35 million in savings during 2022. Apart from this, the company’s digital transformation initiative is an important driver for improved data and efficiencies. Finally, management is committed to making marketing investments, undertaking innovation and going for smart M&A activities in line with its portfolio strategy.

Over the long term, the company expects sales growth of 1-2% annually, EBITDA growth of 4-6% and earnings per share increase of 7-9%. Both sales and EBITDA outlook exclude impacts of any future buyouts. The aforementioned factors will likely keep driving Flowers Foods’ growth.

Acquisitions: Key Driver

Flowers Foods has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. The company acquired over 100 companies since 1968 and believes that there’s still plenty of potential related to mergers and acquisitions (M&A) activities. In 2015, the company bought Dave’s Killer Bread (DKB) and Alpine Valley Bread company. In December 2018, the company completed the buyout of Canyon Bakehouse, which has helped Flowers Foods foray into the growing gluten-free bakery space. Brands like DKB, Nature's Own and Canyon Bakehouse continue to perform well. In 2021, Nature’s Own, Dave’s Killer Bread and Canyon Bakehouse increased tracked channel sales by 0.3%, 11% and 16%, respectively. These brands also gained a combined 60 basis points (bps) of market share in 2021.

Several other companies in the food space are benefiting from acquisitions, including Post Holdings, Inc. (POST - Free Report) , The Kraft Heinz Company (KHC - Free Report) and Hormel Foods Corporation (HRL - Free Report) . During the first quarter of fiscal 2022, Post Holdings’ top line included $97.8 million in net sales from acquisitions. This includes the Private label ready-to-eat (PL RTE) cereal business, Egg Beaters liquid egg brand, Almark Foods business and related assets and the Peter Pan nut butter brand. On Feb 1, 2021, POST acquired Almark Foods, which is renowned for its hard-cooked and deviled egg products and provides conventional, organic and cage-free products. On Jan 25, Post Holdings acquired the Peter Pan peanut butter brand.

Kraft Heinz recently acquired a majority stake in a Brazil-based condiments and sauces company — Companhia Hemmer Indústria e Comércio ("Hemmer"). The buyout will widen Kraft Heinz's International Taste Elevation platform and enhance its presence across emerging markets. In January 2022, KHC acquired an 85% stake in Germany-based Just Spices GmbH (“Just Spices”). The buyout enhances its direct-to-consumer operations and go-to-market expansion.

On Jun 7, 2021, Hormel Foods acquired Planters snacking portfolio from Kraft Heinz. In its last earnings call, HRL highlighted that Planters continues to perform at the high end of its expectations. Hormel Foods acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse, in March 2020. The buyout is in sync with its initiatives to strengthen foodservice position.

Pricing Actions Solid

Flowers Foods’ has been benefiting from its pricing efforts for a while now. During the fourth quarter of fiscal 2021, the company’s net price/mix increased 6.2%. The metric primarily gained from price increases to combat inflationary pressures and growth in more-profitable branded retail products. The company remains on track with pricing efforts to counter cost inflation.

We believe that such well-chalked out pricing endeavors along with the aforementioned upsides are likely to help the Zacks Rank #2 (Buy) company stay in investors’ good books. FLO’s shares have appreciated 7.4% in the past six months compared with the industry’s 5.5% growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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