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Flowers Foods (FLO) Troubled by Foodservice Declines, High Costs

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Flowers Foods, Inc. FLO has been witnessing softness in its foodservice business due to social distancing trends amid the pandemic. Also, the company has been witnessing escalated costs for a while now. Apart from these, the company’s guidance for fiscal 2021 reflects year-over-year declines in sales and earnings per share.

Nonetheless, the company has been benefiting from its focus on strategic priorities as well as long-term objectives. Also, burgeoning retail demand stemming from high at-home consumption amid the pandemic and a favorable price/mix have been drivers, as reflected in the company’s fourth-quarter fiscal 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and increased year over year. Let’s delve deeper.

Factors Weighing on Flowers Foods

While branded retail sales have been strong for the company (including the fourth quarter of fiscal 2020), its foodservice performance has been under pressure. Increased social distancing and stay-at-home trends, and other government restrictions started to hurt foodservice results from mid-March 2020. Incidentally, non-retail and other sales declined 6.8% to $210.5 million in the fourth quarter mainly due to adverse impacts on foodservice customers amid COVID-19.

The company’s non-retail and other category includes foodservice, institutional, vending, thrift stores, restaurants and contract manufacturing. Its store-branded retail sales fell 2.6% to $137 million mainly due to a decline in volumes as consumer purchasing shifted to branded retail products. We note that Flowers Foods has shifted focus from foodservice to branded-retail products, given the current situation.

Flowers Foods, Inc. Price, Consensus and EPS Surprise

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

Flowers Foods, Inc. price-consensus-eps-surprise-chart | Flowers Foods, Inc. Quote

Additionally, the company has been seeing higher costs for a while now. During fourth-quarter fiscal 2020, adjusted selling, distribution and administrative expenses (as a percentage of sales) rose 10 basis points (bps) to 37.9% due to increased distribution fees, escalated employee-incentive costs and higher marketing expenses. We believe that the persistence of such trends is a threat to the company’s performance in the future. Apart from these, the company expects its digital strategy to entail considerable capital investments as well as expenses over the next several years.

In fiscal 2021, management projects sales in the range of $4.21-$4.30 billion, suggesting a decline of 4-2% year over year. This includes a 1.8% sales reduction due to one less week in fiscal 2021. Further, earnings per share are envisioned in the range of $1.07-$1.17 that includes an effect of nearly 2 cents from one week less in fiscal 2021. The company’s adjusted earnings per share came in at $1.31 in fiscal 2020.

Can Strategic Priorities Help?

Flowers Foods is on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. To this end, the company intends to shift focus to value-added branded retail products, which are anticipated to aid top-line growth and enhance margins. Also, the company expects its optimized portfolio to drive market share gains through innovation. Further, Flowers Foods remains focused on optimizing the supply chain while enhancing efficiency and reducing costs. Finally, management intends to remain committed to making marketing investments, undertaking innovation and going for smart M&A activities in line with its portfolio strategy.

While these upsides are likely to drive growth, it is yet to be seen if these can help this Zacks Rank #4 (Sell) company counter the above-mentioned headwinds. While shares of Flowers Foods have gained 3.8% in the past three months, it has lagged the industry’s growth of 5.3%.

Binge on These Food Stocks

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