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Will High Costs Hinder Flowers Foods' (FLO) Q4 Earnings?

Zacks Equity Research

Flowers Foods, Inc. FLO is slated to release fourth-quarter 2018 results on Feb 6. This provider of packaged bakery foods delivered negative earnings surprise of 11.5% in the last reported quarter and has a mixed earnings surprise record in the trailing four quarters.

Which Way Are Estimates Heading?

The Zacks Consensus Estimate for earnings currently stands at 15 cents, depicting a decline of 11.8% from 17 cents per share in the year-ago quarter. We also note that the Zacks Consensus Estimate has remained stable in the past 30 days. Further, the consensus mark for revenues stands at $866.7 million, reflecting a decline from $873.6 million recorded in the year-ago period. 

Flowers Foods, Inc. Price and EPS Surprise

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

Factors Affecting the Stock

Flowers Foods has been battling high costs for quite some time now. The company has been witnessing increased materials, supplies, labour and other production costs (excluding depreciation and amortization) for four straight quarters. In the third quarter of 2018, this metric as a percentage of sales expanded 150 bps to 52.6%. This increase can be primarily attributed to elevated commodity costs, lower production volumes, greater outside product purchases owing to robust demand for DKB breakfast items and lower manufacturing efficiencies. Persistence of these headwinds may hurt the company’s profitability in the upcoming quarterly release. 

Moreover, the company is grappling with soft EBITDA for the past four quarters. Also, Flowers Foods continued to be negatively 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. Such downsides prompted management to lower its adjusted earnings per share outlook for 2018, raising concerns for the quarter to be reported.

Nevertheless, Flowers Foods is progressing well with Project Centennial. The plan is aimed at streamlining operations, lowering expenditures, fuelling efficiencies and making prudent investments to solidify Flowers Foods’ competitive position and aid revenue growth. Markedly, management expects gross savings of $38-$48 million in 2018 from this plan, which should provide some cushion to the stock in the quarter under review.

Apart from this, the company is focused on acquisitions to strengthen its product portfolio and expand in untapped markets. In this regard, Flowers Foods recently acquired Canyon Bakehouse, which is a privately held, gluten-free baking company. This buyout will help Flowers Foods foray into the growing gluten-free bakery space. These efforts are likely to continue enhancing the company’s portfolio, which, in turn, will help it gain market share.  Also, 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. Continued gains from these businesses bode well for Flowers Foods. 

What the Zacks Model Unveils

Our proven model doesn’t show that Flowers Foods is likely to beat bottom-line estimates this quarter. For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Flowers Foods has a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post earnings beat:

Nomad Foods Limited NOMD, a Zacks #2 Ranked company, has an Earnings ESP of +1.45%. You can see the complete list of today’s Zacks #1 Rank stocks here.

McCormick & Company MKC has an Earnings ESP of +1.70% and a Zacks Rank of 3.

Post Holdings POST has an Earnings ESP of +2.00% and a Zacks Rank of 3.

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