Flowers Foods, Inc. FLO appears well-placed for growth due to its strategic initiatives and solid pricing. Also, the company’s non-retail and other channel has been seeing sales growth for a while. These factors were well-reflected in the first quarter of fiscal 2022, wherein management raised its sales view for the fiscal. However, the company lowered its earnings per share or EPS guidance due to cost inflation and supply-chain headwinds.

Let’s delve deeper.

Factors Acting as Upsides

Flowers Foods has been on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. To this end, management has been shifting its focus on becoming a more brand-focused company. The company expects its optimized portfolio to drive market share gains through innovation. FLO is focused on undertaking innovation in its leading brands, which is likely to aid growth.

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 on track with incremental cost-saving measures, mainly across operational efficiencies and procurement, for 2022. Management expects such programs to generate an additional $25 to $35 million of savings during 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.

Flowers Foods has been benefiting from its pricing efforts for a while now. In the first quarter of fiscal 2022, the company’s net price/mix increased 13.5% and boosted sales in all channels. Pricing and advancement in more-profitable branded retail products drove most of the sales increase in the quarter. The metric mainly benefited from price increases to combat inflationary pressure. In its first-quarter earnings release, the company stated that it has undertaken price increases to counter shortages and dynamic commodity prices. Management expects the pricing action to come into effect in the fiscal second quarter.

Another factor aiding Flowers Foods’ performance is strength in non-retail and other sales, which jumped 10.2% to $306.2 million in the first quarter, mainly driven by increased pricing. Although non-retail and other sales remain below pre-pandemic levels, the company is seeing continued recovery with stronger margins.

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Cost Headwinds

Flowers Foods is battling major hurdles due to cost inflation and supply-chain bottlenecks. In the first quarter of fiscal 2022, materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by 110 basis points (bps) to 50.5%. This resulted from increased ingredient and packaging expenses, which led the gross margin to contract 110 bps. Selling, distribution and administrative expenses came in at 38.6% of sales, up 10 bps, due to escalated consulting costs and transportation cost inflation. Adjusted EBITDA grew 2.4% to $165.5 million. The adjusted EBITDA margin was 11.5%, which contracted 90 bps. Management expects high-single-digit to low-double-digit cost increases for the year.

A Look at Q1 & Ahead

Flowers Foods delivered impressive first-quarter fiscal 2022 results. The top and bottom lines increased year over year and surpassed the Zacks Consensus Estimate in the quarter. Branded, store-branded retail and non-retail and other sales rose year over year. The adjusted EPS of 44 cents surpassed the Zacks Consensus Estimate of 38 cents. The bottom line increased from the 41 cents reported in the year-ago quarter. Sales increased 10.3% to $1,435.9 million and surpassed the Zacks Consensus Estimate of $1,405 million.  

For fiscal 2022, FLO expects sales in the range of $4.764-$4.850 billion, suggesting an increase of 10-12% year over year. Earlier, management expected sales for fiscal 2022 in the range of nearly $4.660-$4.695 billion, suggesting a 7.6-8.4% increase from the year-ago reported figure. However, the adjusted EPS is now envisioned in the range of $1.20-$1.30. Management earlier expected the adjusted EPS between $1.25 and $1.35. Though the company has undertaken price increases to counter shortages and dynamic commodity prices, it expects the pricing action to come into effect in the fiscal second quarter.  Incidentally, the price lag and supply-chain disruptions are likely to hurt the EPS by 5 cents in total in the fiscal second and third quarters, with the second quarter bearing the maximum impact.

Shares of this Zacks Rank #3 (Hold) company have risen 2.9% in the past three months compared to the industry’s decline of 2.3%.

3 Solid Staple Stocks

Some better-ranked stocks are Sysco Corporation SYY, Pilgrim’s Pride PPC and Campbell Soup CPB.

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1 (Strong Buy). Sysco has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for SYY’s current financial-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, carries a Zacks Rank #2 (Buy). Pilgrim’s Pride has a trailing four-quarter earnings surprise of 31.4%, on average.

The Zacks Consensus Estimate for PPC’s current financial-year EPS suggests growth of almost 43% from the year-ago reported number.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2. Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.5% from the year-ago reported figure.

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