Flowers Foods: End-Market Opportunity, Smart Strategies, And Cost Cutting Can Help It Improve

| About: Flowers Foods, (FLO)
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Summary

Flowers Foods' sales have been declining due to lower volumes and stiff competition, but investors shouldn't lose hope.

Flowers is looking to improve its financial performance on the back of cost cuts, efficiency gains, and improved service.

Flowers' valuation and growth projections look bright, indicating that the company can do better in the long run.

Flowers Foods (NYSE:FLO) performance in 2014 has left a lot to be desired. The company's shares have declined 13%, as it has struggled so far this year on the back of a decline in cake volumes. As a result, the company has been aggressively looking to expand and promote itself, but this has created pressure on its financial performance. However, the company is putting its best foot forward in order to keep its financial performance intact in a difficult environment.

Why Flowers can execute a turnaround

Sales of cakes and bakery products in the U.S. have been strong, and the trend is expected to continue. According to a report:

"The $11.2 billion prepared cakes and pies category grew 24% from 2009-14, boosted by interest in the category during the economic recession, as well as the period surrounding the Hostess Brands bankruptcy in 2012. Despite a general trend toward healthier eating in the US, the category continues to grow. In general, consumers agree cakes and pies should only be eaten in moderation; however, many view the category positively in terms of taste and quality. Looking ahead, category growth will rely on manufacturers' ability to meet consumer demands for better ingredients, great taste, and portability."

Now, Flowers Foods is trying to make better use of the opportunity by improving both distribution and its product offerings. Flowers is bolstering its distribution network to increase its cake business with the Tastykake brand. It is focused on enhancing this segment with the introduction of new products and flavors, along with more appealing packaging. As a result, Flowers is expanding its line of single-serve items and will use seasonal packaging in a bid to attract more customers.

Smart strategies to keep bottom line growth intact

Flowers is looking to keep its bottom line intact by following cost-saving measures that include the closure of underperforming facilities. As a result, despite bearing higher costs for added production activity, Flowers' bottom line improved last quarter. Looking ahead, the company is undertaking moves to improve its fundamentals, along with margin expansion, and is increasing its reach into new markets to enhance its top line.

In fact, Flowers seems to be following a smart strategy. In a competitive environment, many of its rivals are relying on heavy price promotions to drive volumes. However, Flowers is sticking to its decision of decreasing promotional spending, which is a smart decision as this will help it keep its balance sheet in good shape.

However, Flowers' decision to cut back on promotional spending might raise some eyebrows as its sales are dropping. Management, however, aims to boost its sales by providing improved services and expanding shelf space. Explaining this further, CEO Allen Shiver said, "We will increase sales through outright displays and expanded shelf space. Our team will continue to execute on these basics to further increase sales in our core markets."

A closer look at cost-reduction strategies

Moreover, apart from service improvements and expansion, cost reduction is yet another important initiative that Flowers is undertaking. Management is working hard to refine its operations, which will ultimately reduce its cost structure, and its efforts have already started bearing fruit. In fact, during the quarter, it improved its manufacturing efficiency by 270 basis points. Looking ahead, management is confident of being able to sustain its cost reduction strategies. According to CEO R. Kinsey:

"I have confidence that we continue to drive stronger margins through better management of promotional activity, reducing sales of returned product, continuing to work on improving efficiencies and continuing to eliminate plant carrying costs as we sell these idled facilities. By focusing on cost reductions and leveraging sales through brand and marketing expansion, we should be able to meet our targets over the long term."

Valuation and conclusion

In addition, Flowers' valuation also indicates that its performance will improve in the long run. Currently, it has a trailing P/E of 21, at par with the industry P/E of 19. Its forward P/E of 18.7 reflects that more bottom line improvements on the way. Moreover, analysts also expect Flowers' sales to improve going forward in the next fiscal year, projecting an year-over-year sales improvement of 2.3%. More importantly, in the next five year's Flowers' earnings are expected to increase at a compound annual rate of 12.3%, better than the earnings growth of 8.9% a year seen in the last five.

Thus, investors shouldn't panic as Flowers' performance can improve in the future on the back of the strategies that it is adopting.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.