"Bake it and they will come."
I know ... that's a pretty clumsy paraphrase of the famous line from Field of Dreams. But it aptly describes the second-quarter results posted yesterday by bakery specialist Flowers Foods
For Foolish investors unfamiliar with the company, Flowers sells bakery products under a host of brand names that include Nature's Own, Whitewheat, and Cobblestone Mill. The company is organized into two segments, the bakeries group (breads and rolls), and the specialty group (snack cakes and pastries). Distribution is through an extensive direct-store-delivery network in the South and in mid-Atlantic states, and employs third-party distribution networks for other areas of the country.
Second-quarter sales volume grew 7.2%, mostly from pricing. Unit volume was slightly lower year over year. Gross margins were down 100 basis points as a percentage of sales, thanks to stale costs for new product introductions. Unlike dog food or diapers, bakery products have a short shelf life, so product introductions carry higher costs until demand for the new products stabilize.
Savings in selling, general, and administrative expense offset the margin loss. The company trimmed 110 basis points from its expense base through distribution efficiencies and leverage on the sales increase. EPS of $0.24 grew 14.3% year over year and exceeded analyst expectations by a penny.
Usually I look very carefully at inventory levels as an indicator of future results, but inventory is minuscule for a bakery company. Instead, I will note that the company has only 5% debt to total capitalization, and free cash flow for the quarter of $29 million exceeded net income of $22 million. I'm thinking this type of free cash flow for a baker is pretty sweet (pun intended). For the past three years, Flowers has banked free cash flow of $192 million, identical to net earnings.
Most of the giant consumer product companies like Procter & Gamble
I would add regional consumer product companies to this list. Flowers has the added benefit of an efficient direct-to-store delivery network, which gives it a little more pricing flexibility than the giants, who primarily ship their products through retailers' in-house distribution networks.
The stock valuation may be a tad pricy, with a trailing-12-month PE of more than 21 and a PEG ratio of more than 2. But in these uncertain times, I can make a solid argument to favor cash flow more highly than future growth. Might be worth a taste.
Start your day off with these sweet treats:
Unilever is a Motley Fool Income Investor recommendation.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any of the companies mentioned in this article.
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