Flowers Foods’ Q2 Earnings: Is Now the Right Time to Invest?

Key Points

• Flowers Foods reported mixed second-quarter results, but the negative impact of business exits last year should be minimized toward the end of the year.
• The company's efforts to grow its branded bread products have been successful, including unit and dollar market share gains in the last quarter.
• Added differentiation, including through keto products, has driven customer interest at a time when inflationary pressures may be falling.

Packaged bakery goods maker Flowers Foods Inc. NYSE: FLO reported mixed results for the second quarter as revenue fell by under 1% to $1.2 billion, failing to meet analyst predictions, and adjusted diluted earnings per share of 36 cents beat consensus estimates by 3 cents.

The company's move in recent months to highlight its branded products in the fresh packaged bread category has seen early successes, and business continues to grow in underpenetrated regions across the country. Despite the continued drag on sales from last year's business exits, there is reason to watch Flowers going forward.

Branded Bread Products Boost Profit Margins for Flowers Foods

Roughly flat sales performance for the quarter can be attributed primarily to volume declines related to Flowers' business exits in 2023, an obstacle that chairman and CEO A. Ryals McMullian said is "waning." He added that the company expects this headwind to have "virtually no effect in the fourth quarter."

Volume trends in the fresh packaged bread category turned positive toward the end of the quarter but were flat year-over-year overall. Similarly, Flowers noted a 40-basis-point gain in unit volume share in the bread category in the last month of the period.

Flowers' efforts to highlight its branded bread products — including Dave's Killer Bread, Wonder, and Nature's Own — began earlier this year when the company said its non-branded business failed to provide adequate profit margins. Thanks in part to savings initiatives, margins have improved; gross profit margins improved by 90 basis points to 49.9%, while the adjusted EBITDA margin of 11.7% for the quarter was up from 10.8% in the prior-year period.

The second quarter's overall sales performance also masks the relevant market share improvement Flowers achieved in fresh packaged bread. The company carved out a 40-basis-point improvement in dollar market share and a 20-point gain in unit volume share in this category. Sandwich buns and rolls were a standout product line, providing an 80-basis-point unit market share improvement.

Notably, bread sales and volume continue to outperform. Branded retail bread volume in tracked channels was up 1.5%, while the category as a whole declined 0.2%. Altogether, this means that the branded retail category represented 64.5% of Flowers' sales in the quarter. With plans to continue focusing on this product category, Flowers could be positioning itself for additional success in the coming quarters.

Differentiation Drives Growth for Flowers Foods

McMullian acknowledged Flowers' use of promotions during a period of economic pressure in which consumers seek greater value, although promotional levels remain well below pre-pandemic highs from 2019. He also highlighted that the company sees consumer demand for unique products as a key strength for Flowers. Nature's Own gained 10 basis points of dollar share during the quarter, behind Dave's Killer Bread, Wonder, and Canyon Bakehouse, but its line of keto bread was highly successful. Dollar share for that subcategory was up 710 basis points. This is likely to continue with the addition of new keto bun products. McMullian pointed to the challenges of inflation in recent quarters but said that Flowers sees the current environment as "encouraging" for growing interest in differentiated products.

These are some of the key factors that could drive market penetration in new regions. In the company earnings call, McMullian said that Flowers' primary market is the South but that the company sees significant potential in the Upper Midwest, the Northeast, and other regions. Not all of Flowers' products are available in all regions, and the firm does not yet have a national marketing campaign. Investors may watch these other regions for signs of Flowers' expansion.

If Trends Continue, Flowers Foods Could Be a Stock to Watch

Flowers seems to be focusing its efforts on some of its high-margin, high-consumer-interest product lines and has an eye toward expanding its reach as a consumer staples company on a national scale. The company stands to benefit from a potential interest rate change coming up in September that could free customers to seek broader differentiation in branded bread products.

Executives have indicated that Flowers is prepared to make M&A moves when the right opportunity becomes available, which could further jump-start its growth into new regions and categories.

Despite somewhat lackluster results last quarter and a spike in short interest last month, these are some of the signs that Flowers is continuing to grow strong roots beneath the surface.