One of the most interesting things about the grocery industry is how food items make their way to your pantry. The market for baked goods has historically been highly fragmented, with small local providers serving up substantial amounts of bread, cake, and other items to supermarkets. Flowers Foods (NYSE:FLO), though, has aimed to change that, establishing a growing network of production facilities to serve a nationwide client base.
Coming into Thursday morning's fiscal-first-quarter financial report, Flowers Foods investors had expected minimal growth in net income, and the baker's flat earnings and slight decrease in sales showed some of the challenges facing the business. Still, the company sees better times ahead. Let's take a closer look at Flowers Foods and what its most recent report says about the food industry.
Why Flowers Foods' dough didn't rise
Flowers' fiscal-first-quarter results revealed a company in a slump. Overall sales fell 0.7% to $1.15 billion, which was slightly less than the breakeven performance most investors had expected from the baker. A tiny gain in net income to $61 million wasn't enough to move earnings per share above last year's $0.29, as Flowers failed to provide the penny per share of growth that those following the stock had anticipated.
A closer look at Flowers Foods displays some of the steps the company has taken in an effort to bolster its business. In the direct-store delivery segment, Flowers grew sales by 0.3%, with particular strength in nonretail sales and in sales of its own branded products. Some of those gains came at the expense of store-branded products, though. Meanwhile, warehouse delivery segment sales dropped almost 6%, but much of that came from Flowers' move last year to stop producing tortillas for the nonretail market. A more competitive environment for snack cakes also held back results.
Yet Flowers also understands that focusing on better business is smart. Despite the sales decline in the warehouse segment, for example, its operating income jumped 12%, with a better product mix leading to much wider margins. Similarly, the company has sought to increase its production efficiency, which should pay off in lower expenses well into the future.
In the earnings press release, Flowers CEO Allen Shiver expressed satisfaction with the results, with pride in the fact that "we are making progress as we focus on profitable growth." A combination of higher-margin sales and reduced costs for ingredients has helped push Flowers forward.
Will Flowers find earnings-yeast to make its results rise?
Flowers has ambitious plans for the future. As Shiver noted, the company will open a new bakery in Kansas later this summer, with the hope that the new facility will help Flowers reach out to markets it has targeted for expansion. At the same time, Flowers isn't neglecting its core markets, with plans to introduce new products under its well-known Tastykake and Cobblestone Bread brands.
Despite the value of growing internally, Flowers has gotten to where it is largely through acquisitions. In such a fragmented industry, establishing economies of scale has given the bakery company a large competitive advantage over small providers, and that in turn offers would-be acquisition targets a huge incentive to consider buyout offers from Flowers.
Still, Flowers has to deal with substantial competition. The reintroduction of the Hostess brand has hurt Flowers in the snack-cake arena, particularly since Hostess has national scope and broad customer appeal. That only makes it more important for Flowers to use its own brands, which also include Wonder Bread and Nature's Own, as efficiently as possible to drive results.
Given its relatively high earnings multiple, it's important for Flowers to stay on its long-term trajectory toward growth. A single sluggish quarter doesn't necessarily make the bear case for Flowers, but investors will want a substantial bounce going forward in order to regain confidence that the baker is moving in the right direction.