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Can Buyouts & Project Centennial Fuel Flowers Foods Further?

Zacks Equity Research

Flowers Foods, Inc.’s FLO shares have gained close to 7% in a year, against the industry’s decline of 15.2%. The company has been befitting from strategies like focus on buyouts along with its Project Centennial, though at the same time it is battling cost-related hurdles. So, let’s see if Flowers Foods’ endeavors can help offset obstacles and fuel growth at this Zacks Rank #3 (Hold) stock.

Project Centennial & Buyouts on Track

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

Further, the company intends to expand its portfolio and increase adjacencies in the bakery category through organic growth and acquisitions. Markedly, management expects gross savings in the upper end of $38-$48 million in 2018, on the back of a more productive organizational structure, lower expenditure on purchased goods and services, supply-chain optimization, and enhanced order and stale reduction efforts.

Talking of acquisitions, the company concluded the buyout of gluten-free baking firm Canyon Bakehouse LLC in December 2018. The inclusion of this Johnstown-based company is likely to expand Flowers Foods’ presence in the gluten-free foods category, which is gaining traction from consumers’ rising demand for the same. Well, Flowers Foods has long been focused on acquisitions to strengthen its product portfolio and expand in untapped markets.

Notably, the company has acquired more than 100 companies since 1968. In 2015, the company bought Dave’s Killer Bread (DKB) and Alpine Valley Bread companies. With the acquisition of DKB, the company got access to the Pacific Northwest market. These efforts are likely to continue enhancing Flowers Foods’ portfolio, which, in turn, will help it gain market share. Notably, strength in DKB, Nature's Own and Wonder brands drove Flowers’ Foods’ market share in the third quarter of 2018, which marked the company’s ninth consecutive quarter of market share improvement.

Will Cost Woes be Offset?

Flowers Foods has been witnessing a year-over-year decline in EBITDA for the past four quarters. In third-quarter 2018, adjusted EBITDA margin contracted 140 basis points (bps) to 10.6%, due to increased costs of marketing inputs, manufacturing, workforce and freight. Also, the company continued to be impacted by disruptions associated with the inferior yeast. Incidentally, the company encountered operational hurdles at many bakeries during the third quarter, owing to substandard yeast received from a supplier. These factors also weighed on gross margin in the reported quarter, which declined 4.1% from the year-ago quarter.

Moreover, materials, supplies, labor and other production costs (excluding depreciation and amortization) have been rising for four straight quarters. In the third quarter of 2018, materials, labor, supplies and other production expenses as a percentage of sales expanded 150 bps to 52.6%. This upside was mainly associated with elevated commodity costs, lower production volumes, greater outside product purchases owing to robust demand for DKB breakfast items and lower manufacturing efficiencies. We believe that persistence of rising costs is a threat to the company’s margins and profitability.

That being said, we expect Flowers’ Foods’ growth strategies to tide over these headwinds and help the company draw more attention from investors.

Don’t Miss These Solid Food Stocks

McCormick & Company, Incorporated MKC has long-term earnings per share growth rate of 9% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Campbell Soup Company CPB, with long-term earnings per share growth rate of 5.5%, also carries a Zacks Rank #2.

Lamb Weston LW, with a Zacks Rank #2, has long-term earnings per share growth rate of 12%.

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