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What's in the Cards for Flowers Foods' (FLO) Q3 Earnings?

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What's in the Cards for Flowers Foods' (FLO) Q3 Earnings?

Flowers Foods (FLO) has been grappling with high costs for quite some time now. However, Project Centennial and gains from buyouts should offer some respite in Q3.

Flowers Foods, Inc. FLO is slated to release third-quarter 2018 results on Nov 7. This provider of packaged bakery foods delivered negative earnings surprise of 10.7% in the last reported quarter, though it has outperformed the Zacks Consensus Estimate in the trailing four quarters, average beat being 6.4%.

Flowers Foods, Inc. Price and EPS Surprise

Flowers Foods, Inc. Price and EPS Surprise | Flowers Foods, Inc. Quote

Let’s see what’s in store for the company this time around.

Factors Impacting Flowers Foods

Flowers Foods has been battling high costs for quite some time now. The company has been incurring higher materials, supplies, labor and other production costs (exclusive of depreciation and amortization) for three straight quarters. In fact, this metric, as a percentage of sales, expanded 140 basis points (bps) to 51.9% during the second quarter of 2018.

This was associated with promotional costs to support new products and operational issues associated with inferior yeast. Moreover, elevated outside product purchases, owing to robust demand for DKB breakfast items, escalated ingredient costs. We believe persistence of rising costs will be a threat to the company’s margins and profitability.

Well, rising input costs have been posing hurdles to many other food companies like Campbell Soup CPB, General Mills GIS and Conagra Brands CAG, among others. Coming back to Flowers Foods, the company has been witnessing a year-over-year decline in EBITDA for the past three quarters. In second-quarter 2018, adjusted EBITDA margin contracted 140 bps to 10.9% due to higher marketing investments related to new products, and increased commodity, labor and transport expenses along with costs and disruptions associated with the inferior yeast.

Incidentally, the company encountered operational hurdles at many bakeries during the second quarter, owing to substandard yeast received from a supplier. These factors also weighed on the gross margin. Moreover, these headwinds prompted management to lower its adjusted earnings per share outlook for 2018, raising concerns for the quarter to be reported.

Nevertheless, Flowers Foods has been progressing well with Project Centennial plan. The plan is aimed at streamlining operations, lowering expenditures, fueling efficiencies and making prudent investments to solidify Flowers Foods’ competitive position and aid revenue growth. Markedly, management expects gross savings of $38-$48 million in 2018 from this plan, which should also provide some cushion to the company in the quarter under review.

Apart from this, the company should also gain from its acquisitions, which have been strengthening its product portfolio and helping it expand in untapped markets. To this end, strength in DKB, Nature's Own and Wonder brands drove Flowers’ Foods’ market share in the second quarter, which marked the company’s eighth consecutive quarter of market share improvement. Alpine Valley Bread also provided additional organic production capacity to the company.

What to Expect?

The Zacks Consensus Estimate for earnings currently stands at 26 cents, which has remained stable in the past 30 days and also compares favorably with 23 cents per share reported in the year-ago quarter. However, the consensus mark for revenues stands at $929 million, reflecting a slight decline from $933 million recorded in the year-ago period.

What the Zacks Model Unveils

Our proven model doesn’t show that Flowers Foods is likely to beat bottom-line estimates this quarter.  For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Flowers Foods has a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult.

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

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