Flowers Foods (FLO, Financial) recently reported results for the second quarter that were disappointing. The company has been struggling, which can be seen by the continuous decline in the stock price on the exchange. This time also, the company disappointed investors with poor earnings and revenue figures that couldn’t meet analysts’ expectations. Management is expecting further decline in the financials in the days to come, and so Flowers Foods has lowered its earnings and the sales forecast. Let us have a detailed view at the overall situation at Flowers Foods.
Weak results
Flowers Foods’ quarterly sales declined by 2.3% to $877.4 million as compared to $898.2 million that it posted in the same period a year ago. This also missed consensus estimates of $940.83 million. The company was also disappointing on the earnings part, posting EPS of just 40.21 per share which again missed analysts’ estimates of $0.24 per share.
Things don’t seem easy for Flowers Foods. The company has to make some way out of this grave condition. It has to make some adjustments to ramp up its declining sales which affected the strength of its bread and rolls segment. The company had many weak points that pressurized its margins. The heavy promotional activities under the expansion plan couldn’t maintain the profit margins and as a result the company’s performance in the financial terms declined. However, the management of Flowers Foods is well aware of these conditions and to be profitable it is focusing on various initiatives.
Is a turnaround possible?
The acquisition strategy remains the most important focus of Flowers Foods. It had made couple of acquisitions in the past and is seeing decent growth in them. It acquired brands such as Wonder, Home Pride, Butternut and Merita. All of these are doing well in the market gaining much traction and the company expects these brands to continue contributing meaningfully to the company’s top line. Flowers Foods has a wide product portfolio.
It is planning to add new products with the existing product lines in the new markets and expects a double digit growth in on a year over year basis. Its popular brands such as Nature’s Own and Wonder are among its top sellers and are seeing strong momentum in the market.
Moving forward, Flowers Foods is also focusing on its cost structure. Under an initiative to improve margins and profitability, Flowers Foods is cutting its promotional activities to level up the status by the end of the fiscal year. It has also re-introduced its acquired brands and is keeping an eye on it as these alterations made in the distribution strategy by the company are expected to ramp up its growth both in revenue and earnings in the coming quarters. Further, under the cost-cutting initiatives Flowers Foods is trimming its underperforming factories such as its Fort Worth tortilla facility.
Flowers Foods is searching for new ventures to improve its profitability. It has already come out of some low margin food business which will help it to improve its margins. The company is also investing in ventures to expand its production capacity. Under this initiative the company has introduced Cobblestone Bread Company.
Flowers Foods also has aggressive expansion plans. It has announced that it will continue to reopen its acquired bakeries to establish an image in the emerging markets. It has already started its bakeries in Henderson, Nevada, and Knoxville, Tennessee, and expanded the bakeries at Modesto, California. To further fuel its growth Flowers is on the lookout for promising acquisition opportunities that fit its overall gross strategy. These initiatives will help the company to achieve its goal of long term profitability.
Conclusion
Focusing on the fundamentals, with trailing P/E of 22.31 Flowers Foods looks quite reasonable. It earnings are also growing with forward P/E of 16.65. However the declining margins and the low earnings yielding can scare investors away from the stock. In the long term Flowers Foods can be a strong long term holding as its earnings are expected to move at a CAGR of 12.30%, which is very close to the industry average. So, though the company is in bad shape as of now, the strategic moves and the strong fundamentals indicate that the stock can gain steam. So, from an investment perspective, investors should consider Flowers Foods for their portfolio.
