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Flowers Foods (FLO) Q4 Earnings Beat Estimates, Sales Up Y/Y

Zacks Equity Research

Flowers Foods, Inc. FLO released fourth-quarter 2018 results, with the top and the bottom line beating the Zacks Consensus Estimate. Also, the top line improved year over year. Results benefited from strong brands. However, earnings declined from the year-ago quarter’s tally due to high costs. Further, management provided view for 2019. Let’s take a closer look.

Earnings & Sales

Adjusted earnings per share (EPS) of 16 cents beat the Zacks Consensus Estimate of 15 cents. However, the bottom line declined 5.7% year over year. The quarter’s performance was hurt by commodity inflation, transportation and other industry related headwinds.

Nevertheless, net sales inched up 0.8% year over year to $880.7 million and beat the Zacks Consensus Estimate of $866.7 million. Sales gained from strong performance of brands such as Nature's Own, Wonder and Dave's Killer Bread. Moreover, sales in the Direct-Store-Delivery (DSD) segment also improved in the quarter.

Flowers Foods, Inc. Price, Consensus and EPS Surprise

 

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

 

Costs & Margins

Adjusted EBITDA declined 14.1% to $78.1 million, whereas adjusted EBITDA margin contracted 150 basis points (bps) to 8.9%.

Materials, labor, supplies and other production expenses (net of depreciation and amortization) as a percentage of sales expanded 70 bps to 53%. This was mainly associated with elevated commodity costs, lower production volumes, greater purchases of outside products (mainly DKB breakfast items) and lower manufacturing efficiencies. These downsides were partially compensated by reduced workforce costs.

Selling, distribution and administrative expenses increased 20 bps to 38.5% of sales owing to increased distributor fees and Canyon Bakehouse acquisition costs. These were partially offset by reduced workforce-related expenses as well as lower Project Centennial consulting expenses and legal settlements.

Category Performance

Consolidated branded retail sales increased 2.3% to $519 million, backed by gains from DKB organic products, Nature's Own Perfectly Crafted breads, improved price/mix and growth in the expansion markets. These were offset by soft volumes in specialty breads, white breads, sandwich buns and rolls.

Store branded retail sales increased 5.2% to $134 million owing to better price/mix and volumes.

Non-retail and other sales dropped 4.7% to $227.6 million due to lower foodservice and vending volumes, somewhat compensated by favorable price/mix.

Segments

Sales in the DSD segment rose 1.2% year over year to $747.7 million on the back of higher branded retail sales and store branded retail sales. The upside was offset by decline in non-retail and other sales. Adjusted EBITDA tumbled 14.9% to $75.4 million.

Sales in the Warehouse segment slipped 1.5% from the year-ago quarter’s tally to $133 million due to softness in most categories. Adjusted EBITDA increased 3.2% to $12.8 million.

More Financial Aspects

Flowers Foods ended the quarter with cash and cash equivalents of $25.3 million as well as long-term debt and capital leases (including current portion) of $1001.5 million. Further, stockholders’ equity amounted to $1,258.3 million.

During the fourth quarter, the company’s cash flow from operating activities amounted to $63.8 million, while it incurred capital expenditures of $24.4 million. Also, Flowers Foods paid dividends worth $38 million during the quarter at the end of which, the company had 6.5 million shares remaining under the ongoing repurchase program.



Other Developments & Guidance

Management is on track with strategic actions under Project Centennial and is accordingly undertaking efforts to revive the core business, lower costs, make use of product adjacencies and develop leading capacities. Progress made on Project Centennial in 2018 includes the introduction of products, acquisition of Canyon Bakehouse, refinement of organizational structure, and development of a trade promotion management system. Further, the company also realized savings of more than $48 million.

Moreover, management is on track with productivity and revenue management efforts to counter inflationary pressures. It is also augmenting supply chain efficiencies to reduce costs. We note that such efforts to boost performance have been fueling investors’ sentiments. Notably, shares of the Zacks Rank #3 (Hold) company gained 6.5% in the past six months, against the industry’s decline of 5.1%.

All said, for 2019, management expects sales in the range of $4.030-$4.109 billion, reflecting 2-4% growth. EPS is projected between 94 cents and $1.02, whose mid-point of 98 cents is currently above the Zacks Consensus Estimate of 97 cents

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