Fitch affirms Flowers Foods ratings

by Eric Schroeder
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NEW YORK — Fitch Ratings on June 30 affirmed several ratings for Flowers Foods Inc., including the company’s issuer default rating at BBB, revolving credit facility at BBB and term loan A at BBB. Fitch also maintained its “stable” outlook for the Thomasville, Ga.-based company.

In affirming the ratings, Fitch said Flowers’ top five position in baked goods in the United States and its No. 1 market share in the southern United States — the primary market in which it competes — have it well positioned for the future, as does the company’s “very strong” credit protection measures and “ample” liquidity.

Free cash flow (operating cash flow less capital expenditures and dividends) at Flowers Foods has been positive in five of the past six years and was $110 million in the 12 months ended April 24, Fitch said.

“There is significant cushion within the rating but is constrained by Flowers’ size and regional focus,” the ratings service noted, adding that management is financially conservative and is expected to manage acquisitions and shareholder friendly initiatives prudently.

Also factored into the ratings is Fitch’s concern about the highly promotional environment that has intensified since the beginning of 2009.

“Although revenues grew almost 8% in 2009 to $2.6 billion, it was almost all driven by acquisitions, secondarily by late 2008 pricing initiatives, which anniversaried in 2009 and the absence of the 53rd week in 2009,” Fitch said. “Quarter-over-quarter organic sales growth declined during 2009 and has been negative since the fourth quarter of 2009 (from 7.3% in the first quarter of fiscal 2009 to minus 1.6% in the fourth quarter of fiscal 2009 and minus 3.1% in the first quarter of fiscal 2010).”

Based on the current negative trajectory of organic sales growth and an environment that continues to be challenging, Fitch said Flowers’ revenue growth will be under “substantial pressure,” but it expects profitability to improve during 2010.

“Commodity prices are declining year over year, and new product roll-outs, such as Nature’s Own 100% whole grain breads and Sandwich Rounds, should benefit margins,” Fitch said.

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