Flowers Foods, Inc. (FLO Quick QuoteFLO - Free Report) has solidified its position as a key player in the packaged bakery industry, boasting a diverse portfolio of beloved brands like Nature’s Own, Dave’s Killer Bread (“DKB”) and Wonder Bread. The company’s strategic priorities, ranging from brand innovation and operational efficiency to targeted acquisitions, pave the way to growth. However, Flowers Foods is grappling with challenges like a tough consumer landscape and margin pressure from increased promotional activity.

Factors Defining FLO’s Growth Trajectory

Flowers Foods has been on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. In recent years, FLO has focused on transforming into a brand-driven company.

In the third quarter of 2024, key brands showcased solid performance, with Nature’s Own and DKB posting unit sales growth of 2% and 4%, respectively. Canyon Bakehouse saw impressive 11%-unit growth, strengthening its dominance in the gluten-free segment. These gains underline the company’s ability to cater to diverse consumer demands, particularly health-conscious and premium offerings.

Innovation has been a cornerstone of Flowers Foods' strategy. The launch of keto-friendly products, including Nature’s Own keto bread, has resonated with consumers, driving significant share gains in the subcategory. Building on this momentum, the company plans to introduce keto hamburgers and hotdog buns in 2024 and 2025. The forthcoming national rollout of Wonder-branded sweet baked goods and DKB snack bites reflects a keen focus on high-growth adjacent categories like indulgent treats and better-for-you snacks.

Flowers Foods is adhering to its objectives. These include executing its portfolio strategy by exiting the low-margin business and replacing it with a margin-accretive new business, enhancing its cost structure, investing in its brands to drive volume and share gains, enhancing the product mix, utilizing technology to improve data visibility and make better strategic decisions and investing in its team to enhance overall execution.

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Obstacles on FLO’s Path

Flowers Foods continues to navigate a challenging consumer environment marked by shifts in spending behavior and heightened promotional activity, both of which have negatively impacted the company's performance in the third quarter of 2024. While the broader food industry has benefited from a consumer shift toward at-home consumption, Flowers Foods faces headwinds specific to its core categories, including fresh packaged bread and cake.

The cake category remains a persistent challenge, reflecting evolving consumer preferences that are shifting away from traditional offerings. With consumers prioritizing at-home dining, the foodservice channel continues to face demand erosion. This shift limits Flowers Foods’ ability to capitalize on recovery opportunities in out-of-home dining spaces. Moving to private label, unit share for private label products declined by 40 basis points during the third quarter, partly due to narrowing price gaps as branded products increased promotional activity. These pressures underscore the company's reliance on struggling segments, presenting risks to sustained revenue growth.

The competitive environment has added pressure, with heightened promotional activity compressing margins. While Flowers Foods has managed to expand its adjusted EBITDA margin through pricing and savings initiatives, sustained promotional reliance could undermine its profitability. Apart from this, inflationary pressures in labor and input costs continue to pose challenges.

Final Thoughts on Flowers Foods

Flowers Foods’ strategic focus on premium brands, innovation and operational efficiency positions it for long-term success. However, navigating weak segments and a competitive market will require careful execution. As the Zacks Rank #3 (Hold) company rolls out new products and streamlines its operations, its ability to adapt to changing market trends will play a key role in shaping its future. 

Shares of FLO have tumbled 10.1% in the past three months compared with the industry’s decline of 9.8%.

Some Solid Staple Bets

We have highlighted three better-ranked stocks from the Consumer Staples sector, namely Ingredion Incorporated (INGR Quick QuoteINGR - Free Report) , Freshpet (FRPT Quick QuoteFRPT - Free Report) and US Foods Holding Corp. (USFD Quick QuoteUSFD - Free Report) .

Ingredion Incorporated manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions derived from wet milling and processing corn and other starch-based materials. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

INGR has a trailing four-quarter earnings surprise of 9.5%, on average. The Zacks Consensus Estimate for Ingredion’s current financial year’s earnings indicates growth of 12.4% from the year-ago reported number.

Freshpet, a pet food company, presently carries a Zacks Rank #2. FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.

The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings suggests growth of 27.2% and 228.6%, respectively, from the year-ago period’s reported figure.

US Foods, together with its subsidiaries, engages in the marketing, sale and distribution of fresh, frozen and dry food and non-food products to food service customers in the United States. It currently carries a Zacks Rank #2. USFD delivered a negative earnings surprise of 0.4% in the last reported quarter.

The Zacks Consensus Estimate for US Foods Holding’s current fiscal-year sales and earnings indicates growth of 6.4% and 18.6%, respectively, from the prior-year reported levels.