Packaged bakery food company Flower Foods (NYSE:FLO) missed analysts' expectations in Q3 FY2023, with revenue up 3.5% year on year to $1.20 billion. It made a non-GAAP profit of $0.29 per share, down from its profit of $0.30 per share in the same quarter last year.
Flowers Foods (FLO) Q3 FY2023 Highlights:
- Revenue: $1.20 billion vs analyst estimates of $1.21 billion (1.2% miss)
- EPS (non-GAAP): $0.29 vs analyst estimates of $0.28 (2.7% beat)
- Free Cash Flow of $99.79 million, up 173% from the previous quarter
- Gross Margin (GAAP): 48.5%, up from 46.8% in the same quarter last year
- Sales Volumes were up 4.1% year on year
With Wonder Bread as its premier brand, Flower Foods (NYSE:FLO) is a packaged foods company that focuses on bakery products such as breads, buns, and cakes.
The company traces its roots back to 1919, when brothers William Howard and Joseph Hampton Flowers commenced their operations with a single bakery and initially sold fresh bread directly to customers from a horse-drawn wagon. The company subsequently grew through organic means as well as through acquisitions, with the 2013 acquisition of Wonder Bread from Hostess as a notable one
Today, some notable products include Nature’s Own Whole Wheat and Honey Wheat Bread, Dave’s Killer Bread, Tastykake cupcakes and donuts, and Mrs. Freshley’s brownies and cakes. Flowers Foods’ core customer is the everyday American household. From the parent packing school lunches to the college student looking for a quick snack, their products have widespread appeal. Recognizing the evolving dietary needs and preferences of consumers, Flowers Foods has diversified its product range, including healthier bread options and organic choices.
The company’s baked goods can be found in many locations selling food and snacks. Wonder Bread and Flower Foods’ other brands are available in supermarkets, convenience stores, and mass retailers. Additionally, a significant portion of their products are sold to foodservice and vending companies.
Packaged Food
As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.
Competitors in packaged bakery goods include Grupo Bimbo (BMV:BIMBO A), Hostess Brands, acquired by J.M. Smucker (NYSE:SJM), and Pepperidge Farm, a subsidiary of Campbell Soup (NYSE:CPB).Sales Growth
Flowers Foods is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 5.6% over the last three years was mediocre, but to its credit, consumers bought more of its products.
This quarter, Flowers Foods's revenue grew 3.5% year on year to $1.20 billion, falling short of Wall Street's estimates. Looking ahead, analysts expect sales to grow 4.2% over the next 12 months.
Volume Growth
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Flowers Foods generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Flowers Foods's average quarterly volume growth was a robust 3%. Even with this splendid performance, we can see that most of the company's gains have come from price increases by looking at its 13.5% average organic revenue growth. The ability to sell more products while raising prices indicates Flowers Foods enjoys inelastic demand. 
In Flowers Foods's Q3 2023, sales volumes jumped 4.1% year on year. By the company's standards, this result was a meaningful deceleration from the 17.8% year-on-year increase it posted 12 months ago. We'll be watching Flowers Foods closely to see if it can reaccelerate demand for its products.
Gross Margin & Pricing Power
Flowers Foods's gross profit margin came in at 48.5% this quarter. up 1.7 percentage points year on year. That means for every $1 in revenue, $0.51 went towards paying for raw materials, production of goods, and distribution expenses. 
Flowers Foods has great unit economics for a consumer staples company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged an impressive 48.1% gross margin over the last eight quarters. Its margin has also been consistent over the last year, suggesting it has stable input costs (such as raw materials).
Operating Margin
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Flowers Foods generated an operating profit margin of negative 4.9%, down 12.5 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.
Zooming out, Flowers Foods has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 5.8%, higher than the broader consumer staples sector. However, Flowers Foods's margin has declined by 3.3 percentage points on average each year. Although this isn't the end of the world, investors are likely hoping for better results in the future. EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q3, Flowers Foods reported EPS at $0.29, down from $0.30 in the same quarter a year ago. This print beat Wall Street's estimates by 2.7%.
Between FY2020 and FY2023, Flowers Foods's EPS grew 70%, translating into an astounding 23.3% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).
Over the next 12 months, however, Wall Street is projecting an average 17.6% year-on-year decline in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Flowers Foods's free cash flow came in at $99.79 million in Q3, up 29.3% year on year. This result represents a 8.3% margin.
Over the last two years, Flowers Foods has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 3.3%, slightly better than the broader consumer staples sector. Furthermore, its margin has averaged year-on-year increases of 1.2 percentage points. This likely pleases the company's investors.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Flowers Foods's decent track record of profitable investments over the last five years gives it the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average ROIC was 12.4%, slightly better than the broader consumer staples sector.
Key Takeaways from Flowers Foods's Q3 Results
Sporting a market capitalization of $4.45 billion, Flowers Foods is among smaller companies, but its more than $14.56 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see Flowers Foods beat analysts' gross margin expectations this quarter. That stood out as a positive in these results. On the other hand, its operating margin missed analysts' expectations and its EPS missed Wall Street's estimates. Overall, this was a mixed quarter for Flowers Foods. The stock is flat after reporting and currently trades at $20.95 per share.
Is Now The Time?
Flowers Foods may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Flowers Foods isn't a bad business, but it probably wouldn't be one of our picks. Although its average annual EPS growth over the last three years has been fantastic, the downside is that its projected EPS for the next year is lacking. On top of that, its estimated revenue for the next 12 months is weak.
Flowers Foods's price-to-earnings ratio based on the next 12 months is 16.7x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Flowers Foods, it seems to be trading at a reasonable price.
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