Project Centennial, impressive price/mix and focus on expansion through acquisitions are likely to drive Flowers Foods, Inc.’s (FLO - Free Report) performance. These factors are also helping the company counter headwinds like soft volumes and escalated costs, and stay in investors’ good books.
Notably, shares of the company have rallied as much as 24.6% in the year so far, outperforming the industry’s growth of 18.1%. Let’s take a closer look and see if this Zacks Rank #3 (Hold) company can sustain this robust momentum.
What’s Driving Flowers Foods?
Flowers Foods is progressing well with Project Centennial and also undertaking several initiatives to revive its core business, lower costs, make use of product advances and develop leading capacities. Project Centennial is aimed at streamlining operations, fueling efficiencies, improving margins by curtailing costs, optimizing supply chain and making prudent investments to solidify the company’s competitive position. The project has propelled the company to become more brand and consumer focused. In fact, based on the restructuring endeavors related to Project Centennial, the company has consolidated all operations under a single segment.
The company is also progressing well with its efficient pricing strategy. This helped it counter inflation in the second quarter of 2019. In fact, price/mix contributed nearly 1.9% to overall top-line growth in the said quarter. Further, management expects its base business to continue gaining from improved price/mix.
Additionally, Flowers Foods has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. To this end, the company acquired Canyon Bakehouse in December 2018 to foray into the growing gluten-free bakery space. Synergies from this buyout largely supported the company’s performance during the second quarter of 2019. Further, the company bought Dave’s Killer Bread (DKB) in 2015, which is driving its market share.
Hurdles Likely to be Countered
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) have been rising for seven straight quarters for Flowers Foods. In the second quarter of 2019, these costs (as a percentage of sales) escalated 20 basis points (bps) to 52.1%. Lower production volumes, reduced manufacturing efficiencies and increased workforce-related costs mainly resulted in this downside. Such rising expenses are weighing on Flowers Foods margins for quite some time now. In 2019, management expects commodity, transport and labor costs to increase roughly 150 bps, as a percentage of sales, which is again a threat to margins.
Also, Flowers Foods’ volumes for the base business have been soft for a while now. During the second quarter, base business volumes slightly declined, which dented the top line by 10 bps. The decline mainly stemmed from lower foodservice and vending volumes, and partly from business losses related to the yeast disruption last year. Also, weak branded cake volumes were a drag. While the company is making solid endeavors to improve volumes, it remained conservative regarding volume growth for the year when it reported the second-quarter 2019 results.
Nevertheless, we believe that Flowers Foods is likely to tide over these barriers on the back of the aforementioned strategies and focus on core priorities.
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