Can Flowers Foods' Strategies Drive Momentum Amid Hurdles?

Even amid hurdles such as elevated costs and soft volumes, Flowers Foods, Inc. FLO has been able to maintain a strong footing in the food space on the back of prudent strategies. The company has been gaining from initiatives like buyouts, Project Centennial and efficient price/mix, which also aided performance in fourth-quarter 2018. Let’s take a closer look at these factors.

Factors Narrating Flowers Foods’ Growth Story

The company has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. To this end, the acquisition of DKB gave the company access to the Pacific Northwest market. Notably, strength in DKB, Nature's Own and Wonder brands drove Flowers Foods’ market share in the fourth quarter of 2018. Also, Flowers Foods acquired Canyon Bakehouse recently, which will enable the former foray into the growing gluten-free bakery space. Also, the transaction is expected to augment earnings in 2020. In 2019, management expects sales to be $4.030-$4.109 billion, reflecting 2-4% growth. Markedly, this includes nearly $70-$80 million contribution from Canyon’s buyout.

Flowers Foods is progressing well with Project Centennial, which is aimed at streamlining operations, fueling efficiencies, improving margins by curtailing cost, optimizing supply chain and making prudent investments. These efforts are expected to solidify Flowers Foods’ competitive position, aid revenue growth and return value to stockholders. Further, the company intends to expand its portfolio and increase adjacencies in the bakery category through organic growth and acquisitions.

Apart from this, Flowers Foods is on track with its efficient pricing strategy. This helped the company counter soft volumes in the fourth quarter, wherein consolidated sales grew 80 basis points (bps), with price mix up 2.6%. Price mix improved in both DSD and Warehouse segments, backed by solid pricing activities across several product lines and increased DKB sales. Further, management expects sales growth in 2019 to benefit from price mix.

Hurdles Likely to be Offset?

Talking of soft volumes, Flowers Foods’ volumes declined 1.8% in the last reported quarter. This was mainly accountable to soft volumes at the foodservice, cake and vending businesses. While the company is making solid endeavors to improve volumes, it remained conservative regarding volume growth for 2019 when it reported fourth-quarter 2018 results.

Moreover, Flowers Foods has been incurring increased materials, supplies, labor and other production costs (exclusive of depreciation and amortization) for five straight quarters. In the fourth quarter of 2018, materials, labor, supplies and other production expenses as 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 reduced manufacturing efficiencies. In 2019, management expects commodity, transport and labor costs to increase roughly 150 bps as percentage of sales.

Well, other food companies like TreeHouse Foods THS, Campbell Soup CPB and General Mills GIS, among others, are grappling with cost-related headwinds. Flowers Foods, however, is expected to counter these shortcomings with the aforementioned endeavors and core growth priorities for 2019. These include refreshing key brands to aid profitably and boost market share, making use of adjacencies, and enhancing supply-chain productivity to lift margins.

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