Flowers Foods (FLO) Well Poised on Pricing Amid Cost Woes

Flowers Foods, Inc. FLO has been gaining from a focus on strategic priorities. These include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions (M&A). The company’s strong brand portfolio, fueled by innovation and acquisitions, is also working well. Efficient pricing actions have been helping Flowers Foods combat increased cost inflation.

Let’s take a closer look.

Flowers Foods’ Growth Drivers

For core priorities, management has been shifting its focus on becoming a more brand-focused company. FLO expects its optimized portfolio to drive market share gains through innovation.

Moving to margins, the company’s brand-building efforts, such as shifting a larger proportion of the sales mix to branded retail, are aiding performance. The company is also undertaking saving measures and efforts to enhance business efficiency.

Management is on track to generate $25 to $35 million of savings from operational efficiencies and procurement this year. Apart from this, the company’s digital transformation initiative is an important driver for improved data and efficiencies. Finally, management intends to remain committed to making smart M&A activities in line with its portfolio strategy.

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Flowers Foods has been focusing on acquisitions to strengthen its product portfolio and expand in untapped markets. The company has acquired more than 100 companies since 1968 and believes that there’s plenty of potential with respect to M&A activities. In the second quarter of 2022, Nature’s Own, Dave’s Killer Bread and Canyon Bakehouse saw tracked channel sales increases of 12.4%, 9.8% and 22.2%, respectively.

The company’s second-quarter fiscal 2022 sales advanced 11% to $1,129 million due to growth in Branded retail, Store branded retail and Non-retail and other sales, with all channels benefiting from increased pricing. Quarterly sales benefited from strength in the company’s leading brands. Branded retail sales grew 9.1% to $735.9 million. Store branded retail sales increased 20% to $157.2 million. Non-retail and other sales jumped 11.4% to $235.9 million.  

During the quarter, the company’s net price/mix increased 14.4% and boosted sales in all channels. Management highlighted that its impressive pricing and portfolio strategies and enhanced efficiencies helped it mitigate various inflationary and supply-chain pressures to generate better-than-anticipated margins in the quarter.

The company mainly benefited from price increases undertaken in June 2022 to combat inflationary pressures.

Will Cost Woes Be Offset?

Flowers Foods is battling major hurdles due to cost inflation and supply-chain bottlenecks. In the second quarter of fiscal 2022, materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by 240 basis points (bps) to 51.9%. This resulted from increased ingredient and packaging expenses, which led the gross margin to contract 240 bps to 48.1%.

Flowers Foods also witnessed a spike in logistics expenses. Adjusted EBITDA fell 1.8% to $120 million. The adjusted EBITDA margin was 10.6%, which contracted 140 bps.

Management stated that inflation remains a deterrent and is likely to reach its peak in the third quarter. However, the company’s pricing actions are likely to mitigate cost headwinds in the remainder of 2022.

For fiscal 2022, the company expects sales in the range of $4.764-$4.850 billion, suggesting an increase of 10-12% year over year. Adjusted earnings per share (EPS) are now envisioned in the range of $1.25-$1.30. Management earlier expected the adjusted EPS between $1.20 and $1.30.

Shares of this Zacks Rank #3 (Hold) company have risen 3.8% in the past six months compared with the industry’s rise of 0.1%.

Consumer Staple Stocks Worth a Look

Some better-ranked stocks from the sector are The Chef's Warehouse CHEF, Lancaster Colony LANC and Celsius Holdings CELH.

Chef’s Warehouse, a distributor of specialty food products in the United States, currently sports a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Chef’s Warehouse’s current financial-year sales suggests growth of 40.7% from the year-ago reported number.

Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently sports a Zacks Rank of 1. LANC delivered an earnings surprise of 170% in the last reported quarter.

The Zacks Consensus Estimate for Lancaster Colony’s current financial-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.

Celsius Holdings, which develops, processes, markets, distributes and sells functional drinks and liquid supplements, carries a Zacks Rank #2 (Buy) at present. Celsius Holdings delivered an earnings surprise of 50% in the last reported quarter.
The Zacks Consensus Estimate for CELH’s current financial-year sales suggests growth of 97.3% from the year-ago period’s reported figure.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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