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Flowers Foods' Buyouts & Price/Mix Bode Well Amid High Costs

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Flowers Foods, Inc. (FLO - Free Report) appears to be in good shape, given the strength of its buyouts and price/mix. The company has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. To this end, it has acquired more than 100 companies since 1968. In 2015, the company bought Dave’s Killer Bread (DKB), which helped it gain access to the Pacific Northwest market.

Further, Flowers Foods took over Canyon Bakehouse in December 2018, which enabled it 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. Additionally, brands like DKB, Nature's Own and Wonder brands continued to drive its market share. Contributions from Sun-Maid breakfast bread also boosted performance.

Notably, the second quarter marked the company’s twelfth consecutive time of market share improvement. In 2019, management expects sales to be $4.030-$4.109 billion, reflecting 2-4% growth. This includes $70-$80 million contributions from Canyon’s buyout.

Additionally, Flowers Foods is progressing well with its efficient pricing strategy. This helped the company counter inflation in the second quarter. In fact, price/mix contributed nearly 1.9% to overall top-line growth in the said quarter.  Price/mix improved in both branded retail and store branded retail categories. Further, management expects the base business to continue gaining from improved price/mix.

Will Cost Woes be Offset?

Like many other food companies such as TreeHouse Foods (THS - Free Report) , Conagra Brands (CAG - Free Report) and Campbell Soup (CPB - Free Report) , among others, Flowers Foods is battling cost-related headwinds. Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) have been rising for seven straight quarters. 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 led to this downside.

In 2019, management expects higher commodity, transport and labor expenses of roughly 150 bps, as a percentage of sales. Though this poses a threat to margins, we expect the company to tide over this hurdle on the back of its strategic priorities, including Project Centennial and the supply-chain optimization plan.

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