A month has gone by since the last earnings report for Flowers Foods (FLO). Shares have added about 4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Flowers Foods due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers. <p style="text-align: justify;"><u><strong>Flowers Foods Q2 Earnings Miss Estimates, Outlook Trimmed</strong></u><br /><br />Flowers Foods reported second-quarter 2018 results. Adjusted earnings per share of 25 cents rose 4.2% year over year, though it fell short of the Zacks Consensus Estimate of 28 cents. Results were impacted by weak margins, primarily due to increased promotions as well as cost inflation of commodities, transportation and labor. Moreover, results were marred by operational hurdles at many bakeries, which stemmed from substandard yeast received from a supplier.<br /><br />Net sales advanced 1.6% to $941.3 million, surpassing the Zacks Consensus Estimate of $937 million. The upside was backed by continued market share gains, which were fueled by strength in the Dave's Killer Bread (DKB), Nature's Own and Wonder brands.<br /><br /><strong>Costs & Margins</strong><br /><br />Adjusted EBITDA declined 9.5% to $102.9 million, whereas the adjusted EBITDA margin contracted 140 basis points (bps) to 10.9% due to higher investments related to trial of new products, increased input and transport expenses as well as costs and disruptions associated with the inferior yeast (as discussed above).<br /><br />Materials, labor, supplies and other production expenses as a percentage of sales expanded 140 bps to 51.9%. This was mainly associated with the aforementioned promotional costs and operational issues associated with inferior yeast along with elevated outside product purchases owing to robust demand for DKB breakfast items, escalated ingredient costs and lower manufacturing efficiencies. These were somewhat cushioned by improved price/mix.<br /><br />SD&A costs improved 10 bps to 38.3% of sales owing to reduced Project Centennial consulting expenses and lower workforce-related expenses. This was somewhat countered by increased distributor fees, considerably high marketing expenses related to the launch of Nature's Own Perfectly Crafted bread, greater legal settlement costs and higher transportation costs.<br /><br /><strong>Category Performance</strong><br /><br />Consolidated branded retail sales rose 1.5% to $557.7 million, driven by continued growth of branded organic products sales and improved price/mix. Also, solid sales of DKB branded products, courtesy of constant introduction of breakfast items, drove performance.<br /><br />Store branded retail sales jumped 3.5% to $149.6 million on account of better price/mix and higher volumes.<br /><br />Non-retail and other sales climbed 0.6% to $234.0 million, backed by greater vending volumes, somewhat negated by weak bakery outlet store sales and unfavorable price/mix.<br /><br /><strong>Segments</strong><br /><br /><strong>DSD </strong>segment witnessed an increase of 0.5% from a year ago to $796.6 million on the back of higher branded retail sales and store branded retail sales, partly offset by decline in non-retail and other sales. Adjusted EBITDA tumbled 10.4% to $97.6 million.<br /><br /><strong>Warehouse </strong>segment sales increased 8.2% from the year-ago quarter to $144.7 million, thanks to strength in all categories. Increase in sales of branded cake largely backed the upside. Adjusted EBITDA declined 1.6% to $16.1 million.<br /><br /><strong>Other Financial Aspects</strong><br /><br />Cash and cash equivalents totaled $29.6 million, and long-term debt and capital leases (including current portion) came in at $825.8 million. Further, stockholders’ equity amounted to $1,297.9 million.<br /><br /><strong>Guidance</strong><br /><br />Flowers Foods’ year-to-date financial performance was not satisfactory. Management revealed that it remains focused on alleviating its cost-related hurdles through its supply-chain optimization plan. Notably, Flowers Foods is progressing well with Project Centennial, and is also undertaking several efforts to revive its core business, lower costs, make use of product advances and develop leading capacities.<br /><br />Though the company’s sales growth was impressive, higher input and transportation costs, increased promotional investments to support new products and hurdles associated with inferior yeast dragged gross and EBITDA margins. These headwinds prompted management to lower its adjusted earnings per share outlook for 2018, though it reiterated its sales view.<br /><br />Management continues to expect sales in the range of $3.921 billion to $3.982 billion, reflecting flat to 1.6% growth.<br /><br />Adjusted earnings per share is now projected in a band of $1.00-$1.07, marking growth of nearly 12.4-20.2%. Earlier, management forecasted the bottom line to range between $1.04 and $1.16, which called for 16.9-30.3% growth on a year-over-year basis.</p>
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.1% due to these changes.
At this time, Flowers Foods has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Flowers Foods has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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