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Rising Costs Make Flowers Foods (FLO) an Unappetizing Pick

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Rising Costs Make Flowers Foods (FLO) an Unappetizing Pick

Flowers Foods (FLO) struggles with high input costs, which compelled management to lower 2018 earnings view.

Like several food companies Flowers Foods, Inc. FLO has also been bearing the brunt of high input costs stemming mainly from materials, supplies, labor and other production costs. Such challenges have weighed on the company’s EBITDA margins, and compelled management to lower earnings view for 2018.

Such downturns were more than enough to dampen investors’ optimism in the stock, evident from 5.8% decline in the past three months, against the industry’s rise of 3.9%. That said, Let’s take a closer look into the aforementioned factors acting as deterrents for this Zacks Rank #5 (Strong Sell) company and see if there are any chances of a revival.

Rising Costs: A Significant Roadblock

We note that Flowers Foods has been incurring higher materials, supplies, labor and other production costs (exclusive of depreciation and amortization) for three straight quarters. In fact, this metric, as a percentage of sales, expanded 140 basis points (bps) to 51.9% during the second quarter of 2018. Moreover, promotional costs to support new products and operational issues associated with inferior yeast raised expense burden in the said period. Incidentally, the company encountered operational hurdles at many bakeries during the second quarter owing to sub-standard yeast received from a supplier.

To make matters worse, elevated outside product purchases and manufacturing inefficiencies contributed toward augmenting costs. Also, the company’s promotional activities to counter competition are concerns.

Margins Slump & Outlook Tweaked

Thanks to such headwinds, the company has been witnessing year-over-year declines in EBITDA for the past three quarters. In second-quarter 2018, adjusted EBITDA margin contracted 140 bps to 10.9%. Moreover, high product and input costs weighed upon gross margin in the second quarter.

Needless to say, persistence of high costs will remain a threat to the company’s margins and profitability. In fact, management lowered adjusted earnings per share (EPS) outlook for 2018 when it reported second-quarter results. Adjusted EPS is now projected in a band of $1.00-$1.07 compared with the previous projection of $1.04-$1.16.

Will Efforts Aid a Turnaround?

In an effort to revive its business, Flowers Foods has been progressing well with Project Centennial plan. The plan is aimed at streamlining operations, lowering expenditures, fueling efficiencies and making prudent investments to solidify Flowers Foods’ competitive position, aid revenue growth and return value to stockholders. Markedly, management expects gross savings in the range of $38-$48 million in 2018 from this plan. Apart from this, the company has been focusing on acquisitions to strengthen product portfolio and expand in untapped markets.

Though such efforts seem impressive, they are yet to bring a complete turnaround to Flowers Foods’ performance. , So, we prefer maintaining safe distance from this stock for the time being. Meanwhile investors may consider the following stocks from the same sector.

Do Consumer Staples Stocks Entice You? Check These

Conagra Brands, Inc. CAG, with a Zacks Rank #2 (Buy), delivered an average positive earnings surprise of 10.8% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Chefs' Warehouse, Inc CHEF, with long-term EPS growth rate of 22%, also carries a Zacks Rank #2.

Pinnacle Foods Inc PF has long-term EPS growth rate of 8% and a Zacks Rank #2.

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