Flowers Foods (FLO) Gains on Acquisitions, Cost Woes Persist
Flowers Foods, Inc. FLO has been gaining momentum on the back of accretive buyouts and efforts to gain market share. Additionally, the company is benefitting from solid price mix and cost-saving strategies, which enable it to counter inflationary pressure. On the back of these upsides, shares of this Zacks Rank #3 (Hold) stock have increased 9.7% in the past year against the industry’s growth of 1.6%.
Buyouts a Key Driver
Flower Foods has been focusing on acquisitions to strengthen its product portfolio. The company successfully completed the integration of Canyon Bakehouse, which was acquired in December 2018. The deal has helped Flowers Foods to foray into the growing gluten-free bakery space. Canyon BakeHouse is already yielding positive results for the company, contributing 2.2% to overall sales in the third quarter.
In earlier developments, Flower Foods acquired brands like Dave’s Killer Bread (DKB), Alpine Valley Bread, Nature's Own, Sun-Maid breakfast bread and Wonder brands. DKB, which was acquired in 2015, has helped the company expand its footprint to the Pacific Northwest market.
Synergies from these acquisitions are propelling the company to boost market share and expand in untapped markets. In fact, management raised its revenue guidance for 2019, when it reported third-quarter results. The company now expects sales in the range of $4.11-$4.13 billion, which calls for 4-4.5% growth from the year-ago quarter’s reported figure. Earlier, sales growth was projected in the range of 2-4%. Markedly, the updated guidance includes nearly $75-$80 million contribution from Canyon BakeHouse.
Will Hurdles be Countered?
Flower Foods has been facing challenges related to rising materials, supplies, labor and other production costs for eight straight quarters. In the third quarter of 2019, higher costs adversely impacted the adjusted EBITDA margin, which contracted 70 basis points (bps) to 9.8%
Additionally, Flowers Foods’ food service, store branded cake and breakfast breads business have been struggling against soft volume growth a while. In the third quarter, the decline was caused by lower foodservice and vending volumes. Moreover, the downside was partly led by business losses related to the yeast disruption in 2018.
Nevertheless, the company is progressing well with Project Centennial, which is aimed at streamlining operations, fuelling efficiencies and improving margins by curtailing cost, optimizing supply chain as well as making prudent investments to solidify its competitive position. Also, the company is progressing well with its efficient pricing strategy.
We expect the aforementioned growth drivers to offset these hurdles and help the company sustain its impressive momentum.
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e.l.f. Beauty, Inc ELF, with a Zacks Rank #2 (Buy), has a long-term earnings per share (EPS) growth rate of 3.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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