Vertical Group adjusts Q4 e.p.s. outlook for Flowers

by Eric Schroeder
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Flowers Foods products
Vertical Group has lowered its fourth-quarter earnings-per-share estimate for Flowers Foods.
 

NEW YORK — Vertical Group has lowered its fourth-quarter earnings-per-share estimate for Thomasville, Ga.-based Flowers Foods, Inc. to 15c, down from 16c, and adjusted its fiscal-year e.p.s. estimate to 87c, which falls inside Flowers’ management’s guidance range of 85c to 90c.

Brett Hundley, Vertical Group
Brett Hundley, equity research analyst at Vertical Group

“We believe that the quarter trended largely in-line with company expectations, with cake remaining competitive and conventional fresh bread remaining somewhat sluggish,” Brett Hundley, equity research analyst at Vertical Group, wrote in the Jan. 10 report. “That said, we believe that Flowers is actively engaged in pricing discussions with customers, and we believe that it is on track with regards to its (Project Centennial) cost savings goals for 2018. We are excited to see what H2’18 may bring, as it relates to sales effects from stepped-up innovation and brand support spend, and we believe that early-year storm activity up and down the East coast could set Flowers off on the right foot for the forward year.”

In adjusting its e.p.s. forecast for the fourth quarter, Mr. Hundley said Vertical Group is acknowledging that the revenue forecast the research firm made for Flowers’ Warehouse segment was previously “too robust.” He also said Vertical Group believes that normalization from hurricane impacts in Texas remained delayed during the fourth quarter.

In the near term, Vertical Group expects Flowers to rely on its Dave’s Killer Bread organic bread brand for positive growth, Mr. Hundley said. He also said the company is on track with its Project Centennial cost savings plan, which is on pace to deliver run-rate gross cost savings of $70 million to $80 million compared with 2016.

Dave's Killer Bread, Flowers Foods
Vertical Group expects Flowers to rely on its Dave’s Killer Bread organic bread brand for positive growth.
 

“Such savings should allow the company to invest more broadly in brand support, something that has been lacking in years past,” he said. “We expect innovation to tick up alongside heightened brand support spend, as the company’s new chief marketing officer (Debo Mukherjee) implements his plan into H2’18.”

Looking ahead to fiscal 2018 and 2019, Mr. Hundley said Vertical Group is leaving its full-year e.p.s. estimates unchanged at 94c and $1.07, respectively.

“We are hopeful that Flowers and the broader industry can leverage increasing raw material costs and questions over wheat quality into higher prices with customers, and we intend to pursue an update on such during the Q4 call,” he said.

Mr. Hundley noted that early storm activity this year up and down the East coast could set Flowers off on the right foot for fiscal 2018, and Vertical Group remains confident in its 28c e.p.s. estimate for the first quarter of fiscal 2018.

Vertical Group reiterated its “buy” rating and $21 price target on Flowers Foods. Potential risks to the price target include Flowers’ inability to make good on Project Centennial cost saving efforts, as well as the potential for the market to become more competitive than expected. Potential legal issues also may prove to be more of a problem than anticipated, Mr. Hundley said. 
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