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Will Flowers Foods' Impressive Momentum Continue in 2020?

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Flowers Foods, Inc. FLO is well positioned for 2020, on the back of yielding buyouts, favorable price/mix and other key growth strategies. These factors, along with focus on Project Centennial, helped this Zacks Rank #3 (Hold) stock showcase a solid run this year despite cost-related headwinds and soft volumes. Notably, Flowers Foods’ shares have rallied 23.7% year to date compared with the industry’s growth of 23.2%.

Let’s take a closer look at the factors working in favor of this provider of packaged bakery foods, which has a Momentum Score of A.

Factors Favoring Flowers Foods

Flowers Foods has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. The company has acquired more than 100 companies since 1968 and 16 since 2003. To this end, it successfully integrated Canyon Bakehouse (acquired in December 2018), which is aiding the company’s performance.  Additionally, brands like Dave’s Killer Bread, Nature's Own and Wonder brands have been driving market share.

Further, management raised guidance for 2019, when it reported the company’s third-quarter results. It expects sales of $4.11-$4.13 billion. The projected figure calls for 4-4.5% growth from the year-ago period’s reported figure. Markedly, this includes a contribution of nearly $75-$80 million from Canyon’s buyout.

Flowers Foods is also progressing well with Project Centennial and undertaking several efforts to revive its core business, lower costs, make use of product advances and develop leading capacities. Project Centennial is an enterprise-wide, multi-year initiative, aimed at streamlining operations, fueling efficiencies, improving margins by curtailing costs, optimizing the supply chain and making prudent investments to solidify Flowers Foods’ competitive position, aid revenue growth and return value to stockholders.

Apart from this, Flowers Foods’ focus on its core priorities bodes well. These include refreshing key brands to aid profitability and boost market share, making use of adjacencies, and enhancing supply-chain productivity to lift margins. Also, the company is executing a multi-year supply-chain optimization plan to reduce fixed costs. This is essential for the company to achieve its margin targets for the long term.

These factors keep the company confident about achieving its goals of 3-4% sales growth and EBITDA margins of 13-14% by 2021. Further, management expects to see a long-term EPS CAGR of 8-10% and an increase of 2-3% in dividend yield for 2019 and beyond.

Hurdles Likely to be Countered

Flowers Foods’ volumes for foodservice, store branded cake and breakfast breads business have been soft for a while now. In the third quarter, 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.

Additionally, materials, supplies, labor and other production costs (exclusive of depreciation and amortization) have been rising for eight straight quarters. In the third quarter of 2019, these costs (as a percentage of sales) increased 10 basis points (bps) to 52.7%. Lower volumes in certain categories, reduced manufacturing efficiencies and increased workforce-related costs mainly resulted in this downside. Management had earlier projected cost inflation in commodity, transport and labor to be roughly 150 bps as a percentage of sales for 2019.

Nevertheless, Flowers Foods is progressing well with its efficient pricing strategy. This helped the company counter inflation in the third quarter of 2019. In fact, price mix contributed nearly 2.1% to the overall top line 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.

Considering these factors, we expect Flowers Foods to continue being in investors’ good books.

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