Consumer Sector Ideas

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Flowers Foods -- >>> This Flower Might Prove To Be a Beautiful One for Your Portfolio


By Himanshu Poddar
MF

August 28, 2012


http://beta.fool.com/justhimanshu/2012/08/28/flower-might-prove-be-beautiful-one-your-portfolio/10089/?ticker=GIS&source=eogyholnk0000001



Though overall spending in the economy has been picking up pace over the last few months, worries of retailers seem to be endless. The food industry has been struggling to fight many other problems apart from soft demand. The most significant one in this context has been the rising commodity cost which is playing the role of a major roadblock for the food industry.

Flowers Foods (NYSE: FLO), specializing in bakery products in the United States, posted results which were mixed owing to the concerns just mentioned. Let’s dig deeper.

A Snapshot of the Quarter

Increased input and packaging costs forced the retailer to push up its product prices. This move affected the overall volumes as consumers started avoiding its goods. Weak demand and higher costs worked together to pull down its second quarter performance. With earnings almost flat, revenue surged 6%, clocking $682 million. This might look quite attractive but it is deceptive. The top line’s driver was Flowers’ well known strategy of acquisitions. Its acquisition of Lepage Bakeries last month and Tasty Baking Company last year did the needful for a decent revenue growth. Definitely, the price hikes have also compensated for the volume declines during the period.

Flowers’ strategy of growth through acquisitions has always worked favorably. It has acquired almost 100 companies since its debut and has managed to work it out efficiently each time. Also, efforts in its Direct Store Delivery segment proved to be fruitful. The segment, which comprises 83% of the total revenue, registered a growth of 7.6% over last year.

As Against the Peers

Flowers’ peers such as Kraft Foods (NASDAQ: KFT) and B&G Foods (NYSE: BGS) have also been going through a similar phase. Both the companies experienced volume declines due to price increases which affected their top lines in the recent quarter. In the recent second quarter results of Kraft Foods it admitted the unfavorable effects of both the price rise and the effect of Early Easter which pulled its sales to the first quarter.

Also, Flowers’ strategy of inorganic growth has also been followed by its peers B&G Foods and General Mills (NYSE: GIS), who have managed to experience better days because of acquisitions. B&G drove its top line through the buyout of Culver Specialty Brands which nullified the negative effect of higher prices in the second quarter. Similarly, General Mills’ acquisition of Yoplait yogurt business enabled it to witness better days.

Hence, all the industry players have made up their minds to fight the monster of higher costs and weak consumer demand in their own way. Flowers is also taking cost saving measures and reducing marketing efforts in order to control costs and provide as much value to customers as possible.

Indeed a Smart Move

Flowers’ July acquisition of Lepage seems to be potential one with great benefits coming in the future. Lepage has a strong presence in the regions of New York and England with strong distribution and store delivery network. Hence, the buyout will not only expand its presence in the two regions but also help the bakery products provider to grow its existing brands in the Northern region.

Final Views

Flowers Foods look to have the potential to grow, given its actions taken to beat the prevailing situation. Since the company’s stock price hasn’t seen much upside, there is scope for investors reaping benefit out of its low price. Since the beginning of the year Flowers has provided 5% to its investors but with recent acquisitions and smart cost cutting strategies, it seems that the company has a potential upside which has not been factored in as yet. Flowers look to have a bright future especially with good retail and unemployment numbers coming in.

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