Flowers Foods Bakes Up Growth From Organic-Bread Acquisitions

By Dan

New acquisitions complement Flowers' Nature's Own line. Image source: Flowers Foods.

The bakery industry is extremely fragmented, but Flowers Foods has been working hard to boost consolidation across the industry and take advantage of favorable trends. In particular, Flowers has emphasized acquisitions that follow the same trend toward healthy eating that grocers like Kroger have pursued, and coming into Wednesday's third-quarter financial report, Flowers Foods investors wanted evidence that the bread maker could still post reasonable growth. The company largely delivered on that front, and although some investors were disappointed with its guidance, Flowers sees a brighter future ahead. Let's take a closer look at Flowers Foods and what its latest results mean for the company going forward.

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What Flowers Foods served up in its latest reportFlowers' third-quarter results largely met or exceeded what investors had expected to see from the company. Revenue rose 4.8% to $885 million, which was almost double the growth rate that those following the stock were looking to see. Adjusted net income rose more than 8% to $48 million, and that produced adjusted earnings of $0.23 per share, matching the consensus forecast among investors.

Unlike what we've seen in recent quarters, the two main business divisions at Flowers Foods had fairly similar top-line performance. Sales for the company's direct store delivery segment rose 4.5%, with name-brand retail sales leading the way higher and offsetting tepid growth in store-brand sales. The warehouse business saw even faster sales growth of 6.1%, with foodservice, vending, and contract manufacturing sales jumping almost 9% and leading the way higher. In terms of adjusted operating income, though, the warehouse segment underperformed, with a 2.4% drop compared to a rise of more than 8% for direct store delivery.

Margin performance showed some disparities. Overall, operating margins rose a tenth of a percentage point to 11.8%. But the gains were isolated in the direct store delivery business, where margins jumped half a percent, compared to a full percentage-point decline for the warehouse division.

CEO Allen Shiver was pleased with the company's results. "It is an exciting time at Flowers," Shiver said, and "we are committed to capitalizing on the opportunities provided by our strategic acquisitions and building on our strong foundation." In particular, Shiver pointed to acquisitions of organic bread makers Dave's Killer Breadand Alpine Valley BreadCompany as potential sources for faster future growth.

What's next for Flowers Foods?Already, the Dave's Killer Bread brand has added to sales. Even though Flowers just bought Dave's in the third quarter, the organic bread company added 1.4 percentage points to the direct store delivery segment's revenue growth rate. Flowers faces some challenges with Dave's, as capacity constraints led to higher costs that offset other cost savings and weighed on operating margins. Nevertheless, Shiver said that a greater focus on organic brands is "on-trend with changing consumer preferences" and that the company "recognizes the quality and values these brands represent."

That's consistent with what other players in the industry are seeing. Kroger has done a good job boosting its organic presence to respond more effectively to customer demand, and Kroger's strategic moves have actually created problems for existing leaders in the organic-food retail industry. With Flowers jumping onto the same trends that have helped Kroger thrive, investors can expect an opportunity for further growth in sales as long as the healthier-food craze continues.

Nevertheless, with the Alpine Valley acquisition going through in the current quarter, Flowers' guidance reflects some of the efforts needed to integrate the two new companies into the Flowers organization. The company narrowed its sales guidance to between $3.818 billion and $3.842 billion, which is slightly toward the higher end of its wider previous range. Guidance for adjusted earnings of $0.96 to $0.98 per share, however, was squarely at the low end of Flowers' previous range, as the company expects only neutral influence from acquisitions on net income per share.

Looking forward, Flowers Foods has put in motion the strategy it will need to remain relevant and maximize its growth opportunities. Even though some investors will be disappointed with its more conservative earnings guidance, Flowers has plenty of long-term potential that could offset short-term weakness in its stock.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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