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Flowers Foods Benefits From Project Centennial & Buyouts

Zacks Equity Research

Flowers Foods, Inc. FLO is progressing well with its growth-oriented strategies. To this end, the company’s focus on Project Centennial, efficient price/mix and buyouts have been working in its favor. However, escalated costs and soft volumes in foodservice, store branded cake and breakfast bread businesses have been concerning.

Let’s delve deeper.

Project Centennial & Buyouts Bode Well

Flowers Foods is on track with Project Centennial, which is an enterprise-wide, multi-year initiative. The plan aims at streamlining operations, fueling efficiencies, improving margins by curtailing costs, optimizing supply chain and making prudent investments to solidify the company’s competitive position, aid revenue growth and return value to stockholders.

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. Going into the second phase, it expects the project to attain greater supply-chain optimization. This will enable the company to achieve greater organizational efficiencies and profitability.

Further, 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. 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 the market share. Notably, management raised its guidance for 2019, when it reported the company’s third-quarter results. It now expects sales of $4.11-$4.13 billion, which 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.

Apart from this, we commend Flowers Foods’ efficient pricing strategy, which helped it counter inflation in the third quarter.  Price/mix improved in both branded retail and store branded retail categories. Further, management expects its base business to continue gaining from improved price/mix.

Cost Inflation & Soft Volumes

However, the company has been grappling with escalated materials, supplies, labor and other production costs (exclusive of depreciation and amortization) for eight straight quarters now. In the third quarter of 2019, these costs (as a percentage of sales) increased 10 basis points (bps) to 52.7%.

Such rising expenses have been keeping Flowers Foods’ margins under pressure for quite some time. In the third quarter, adjusted EBITDA margin contracted 70 bps to 9.8%. Commodity, transport and labor cost inflation remains a concern.

Additionally, volumes in foodservice, store branded cake and breakfast bread businesses 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.

All said, let’s wait and see if Flowers Foods’ splendid growth initiatives can help it counter these challenges and sustain its impressive momentum. Markedly, the Zacks Rank #3 (Hold) stock has rallied 17.8% in a year, outpacing the industry’s growth of 16.2%.

3 Food Stocks Worth a Look

General Mills GIS has a long-term earnings growth rate of 7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lamb Weston LW has a long-term earnings growth rate of 8.8% and a Zacks Rank #2.

Celsius Holdings CELH, with a Zacks Rank #2, has a positive earnings surprise of 33.3%, on average, in the trailing four quarters.

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