This Company Is All Set To Register A Turnaround

Author's Avatar
Nov 10, 2014

Flowers Foods (FLO, Financial), a bakery products manufacturer in the U.S., has had a rough year. Its performance in the last year has been pretty disheartening with a share price decrease of 22%. This is mainly because of certain strategic missteps as well as a decline in demand for cakes. Moreover, weakness in consumer spending in the U.S. has also played an important role here.

Thus, the company’s second quarter results were affected by this. The numbers were below the analysts’ expectations, enabling its share price to fall further.

The analysis

Revenue for the quarter dropped 2.3% over last year. This decline was due to lower volumes of 2.9%, which was partially offset by price increase of 0.6%. Decline in cake volumes has been one of the key reasons for a lower top line. However, increased promotions and higher prices helped the company to some extent.

Also, the bottom line plunged 12.5% to $0.21 per share, as compared to the previous year’s quarter. This was lower than the analysts’ estimate of $0.24 per share. Lower sales and inability to manage costs resulted in lower earnings.

Some positives

Nonetheless, the company is making a lot of efforts to expand its product portfolio and attract more customers. Also, it plans to strengthen its bakery segment through acquisitions. In fact, performance at its acquired brands, such as Home Pride, Merita, Butternut and Wonder, surged 35% over the previous quarter. Further, revenue from new products has been growing, as indicated by an increase of 3% in sales of buns, rolls and breads.

Nature’s Own and Tastykake are some of the most popular brands. Nature’s Own resonates well with the customers mainly because of the healthy and natural offerings it provides to the customers. Consumers have become health conscious, and organic and natural food has therefore become very popular.

Tastykake was bought by Flowers Foods in 2011 and this segment has been increasing since then. Annual revenue from this brand grew $35 million to $460 million, over last year.

Furthermore, market share in the cake segment has been increasing and now stands at 6.7% from 6.6% in 2012. In fact, even the overall demand for bakery products is expected to increase in the next few years. Thus, Flowers Foods has a great chance, especially with its range of acquisitions in this segment.

Moreover, it has been reintroducing its previously acquired brands to make a mark on the customers. This should help in attaining customer attention and adding to the revenue base.

Valuation numbers

The trailing P/E ratio of Flowers Foods stands at 21.67, which is slightly higher than the industry average of 21.52. However, a forward P/E of 16.17 indicates that the company is expected to register earnings growth. This looks impressive. Also, the retailer is poised to grow at the rate of 12.3% for the next five years, which is an impressive growth rate and higher than the industry growth rate of 10.1%.

Summarizing

Although the food retailer is witnessing some issues related to the demand for cakes, its measures to overcome the problems should be fruitful. Its expansionary measures and new product introduction should help in attracting more customers, thereby boosting the top line. Moreover, the valuation numbers also indicate that the company is set to grow. Therefore, Flowers Foods is expected to register a turnaround.