Low-Carb Trends And Retail Shifts Will Erode Margins

Key Takeaways

• Declining demand for traditional bread and growing consumer preference for fresh, minimally processed foods threatens Flowers Foods' core markets and long-term revenue growth.
  
• Increased price competition, retailer bargaining power, and compliance costs put downward pressure on profit margins and complicate efforts to transition to higher-margin products.
  
• Focus on premium, health-oriented innovation and margin protection positions Flowers Foods for resilient growth, strong market presence, and adaptability amid evolving consumer and industry trends.

Catalysts

Produces and markets packaged bakery food products in the United States.

• The accelerating shift away from traditional bread, driven by increased adoption of low-carb, keto, and fresh, minimally processed foods, is expected to shrink Flowers Foods' core markets, putting persistent downward pressure on long-term revenue growth and hindering the company's ability to fully offset volume declines with innovation.
  
• Heightened competitive intensity-especially the entry of more lower-priced brands and intensified industry promotions-risks compressing gross margins and net income as Flowers Foods must spend more on promotional activity and face pricing pressure to protect market share.
  
• Increased environmental scrutiny and consumer concern over ultra-processed foods may result in higher compliance costs and reputational challenges, placing additional pressure on earnings and operating margins.
  
• A significant proportion of Flowers Foods' portfolio and revenue remains tied to legacy brands (notably, traditional loaf bread), requiring a lengthy, multi-year transition to more innovative, higher-margin products, which may slow top-line and margin improvement despite ongoing investment.
  
• Heavy dependence on large retail channels exposes the company to the risk of continued margin erosion as retailer consolidation provides buyers with greater bargaining power, enabling them to demand lower pricing and less favorable terms, negatively impacting revenue and profit margins.

Flowers Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flowers Foods's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.3% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $212.3 million (and earnings per share of $1.0) by about August 2028, down from $219.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $187 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Food industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Flowers Foods Future Earnings Per Share Growth

Risks

• Strong performance and consumer enthusiasm for differentiated, premium, and better-for-you products (e.g., Dave's Killer Bread, Canyon Bakehouse, and keto offerings up 37% in the quarter) demonstrates Flowers Foods' ability to capture secular health trends and command higher margins, potentially supporting revenue and earnings growth.
  
• Successful national rollout and robust retailer and consumer acceptance of new Wonder cake products, with results surpassing expectations and showing no cannibalization of existing brands, indicate the company's capacity to grow top-line revenue through innovation and portfolio expansion.
  
• Ongoing strategic investment in innovation and premium product offerings, as well as efforts to accelerate innovation cycles within brands like Simple Mills, position Flowers Foods to more efficiently adapt to generational category shifts and maintain or grow their revenue base over time.
  
• Gross margin protection strategies, including facility closures, supply chain optimization, and a portfolio shift toward higher-margin products and premium segments, provide levers to support or improve net margins even amid volume and market headwinds.
  
• Leading market share positions in key growth segments (75% share in organic breads) and continued retailer shelf-space gains for premium and health-oriented products give Flowers Foods strong pricing power and resilience in changing industry dynamics, positively impacting revenue and potential earnings stability.

Valuation

• The analysts have a consensus price target of $16.286 for Flowers Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $212.3 million, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $15.72, the analyst price target of $16.29 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.