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Flowers Foods (FLO) Stock Down on Q2 Earnings Miss, View Cut

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Flowers Foods, Inc. (FLO - Free Report) reported second-quarter 2018 results, wherein sales remained strong but earnings fell short of the Zacks Consensus Estimate owing to factors that weighed on margins. These headwinds also caused management to curtail its earnings outlook for 2018. Consequently, shares of the company lost 3.4% during yesterday’s after-market trading session. 

In fact, this Zacks Rank #4 (Sell) company has declined 9.2% in the past three months, against the industry’s growth of 8.1%.  

Adjusted earnings per share of 25 cents rose 4.2% year over year, though it fell short of the Zacks Consensus Estimate of 28 cents. Results were impacted by weak margins, primarily due to increased promotions as well as cost inflation of commodities, transportation and labor. Moreover, results were marred by operational hurdles at many bakeries, which stemmed from substandard yeast received from a supplier.

Flowers Foods, Inc. Price, Consensus and EPS Surprise
 

Net sales advanced 1.6% to $941.3 million, surpassing the Zacks Consensus Estimate of $937 million. The upside was backed by continued market share gains, which were fueled by strength in the Dave's Killer Bread (DKB), Nature's Own and Wonder brands.

Costs & Margins

Adjusted EBITDA declined 9.5% to $102.9 million, whereas the adjusted EBITDA margin contracted 140 basis points (bps) to 10.9% due to higher investments related to trial of new products, increased input and transport expenses as well as costs and disruptions associated with the inferior yeast (as discussed above).

Materials, labor, supplies and other production expenses as a percentage of sales expanded 140 bps to 51.9%. This was mainly associated with the aforementioned promotional costs and operational issues associated with inferior yeast along with elevated outside product purchases owing to robust demand for DKB breakfast items, escalated ingredient costs and lower manufacturing efficiencies. These were somewhat cushioned by improved price/mix.

SD&A costs improved 10 bps to 38.3% of sales owing to reduced Project Centennial consulting expenses and lower workforce-related expenses. This was somewhat countered by increased distributor fees, considerably high marketing expenses related to the launch of Nature's Own Perfectly Crafted bread, greater legal settlement costs and higher transportation costs.

Category Performance

Consolidated branded retail sales rose 1.5% to $557.7 million, driven by continued growth of branded organic products sales and improved price/mix. Also, solid sales of DKB branded products, courtesy of constant introduction of breakfast items, drove performance.

Store branded retail sales jumped 3.5% to $149.6 million on account of better price/mix and higher volumes.

Non-retail and other sales climbed 0.6% to $234.0 million, backed by greater vending volumes, somewhat negated by weak bakery outlet store sales and unfavorable price/mix.

Segments

DSD segment witnessed an increase of 0.5% from a year ago to $796.6 million on the back of higher branded retail sales and store branded retail sales, partly offset by decline in non-retail and other sales. Adjusted EBITDA tumbled 10.4% to $97.6 million.

Warehouse segment sales increased 8.2% from the year-ago quarter to $144.7 million, thanks to strength in all categories. Increase in sales of branded cake largely backed the upside. Adjusted EBITDA declined 1.6% to $16.1 million.

Other Financial Aspects

Cash and cash equivalents totaled $29.6 million, and long-term debt and capital leases (including current portion) came in at $825.8 million. Further, stockholders’ equity amounted to $1,297.9 million.

Guidance

Flowers Foods’ year-to-date financial performance was not satisfactory. Management revealed that it remains focused on alleviating its cost-related hurdles through its supply-chain optimization plan. Notably, Flowers Foods is progressing well with Project Centennial, and is also undertaking several efforts to revive its core business, lower costs, make use of product advances and develop leading capacities.

Though the company’s sales growth was impressive, higher input and transportation costs, increased promotional investments to support new products and hurdles associated with inferior yeast dragged gross and EBITDA margins. These headwinds prompted management to lower its adjusted earnings per share outlook for 2018, though it reiterated its sales view.

Management continues to expect sales in the range of $3.921 billion to $3.982 billion, reflecting flat to 1.6% growth.

Adjusted earnings per share is now projected in a band of $1.00-$1.07, marking growth of nearly 12.4-20.2%. Earlier, management forecasted the bottom line to range between $1.04 and $1.16, which called for 16.9-30.3% growth on a year-over-year basis.

Unsure of Flowers Foods? Check These Solid Food Stocks

Medifast (MED - Free Report) , with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2.

Pinnacle Foods (PF - Free Report) has long-term earnings per share growth rate of 8% and a Zacks Rank #2.

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