CHICAGO — Fitch Ratings affirmed its long-term issuer default rating of “BBB” on July 18 on Flowers Foods, Inc. while maintaining its “stable” outlook for Thomasville, Ga.-based Baker of Nature’s Own, Dave’s Killer Bread, Canyon. Bakehouse and Wonder Bread brands. “BBB” investment grade represents mid-tier companies that are currently satisfactory.
Fitch said its ratings reflect Flower’s “good competitive position as a retail packaged bakery products manufacturer with a strong branded portfolio” but is “constrained by a lack of diversity and component scale from a revenue and EBITDA perspective relative to its larger direct peers and other packages. Food company.”
The rating agency said it expects Flowers Foods to adopt a measured approach to capital allocation related to opportunistic bolt-on mergers and acquisitions and share repurchases in the context of a company with long-term total debt/operating EBITDA below the low 2x range and total EBITDAR below the low 3x range. Near Lease-Adjusted Loans.
Among the key rating drivers identified by Fitch were Flowers Foods’ strong performance during the pandemic, a good portfolio of differentiated brands, a portfolio and supply chain optimization focus and disciplined capital allocation.
“The pandemic has accelerated the growth of high-margin, value-added brands in retail bread products that have gained share and increased margins from higher food-at-home consumption trends,” Fitch said. “A key enabler is Flowers’ ability to leverage significant flexibility within its direct-store-delivery distribution system and bakery production network, moving away from retail fresh packaged bakery production, lower margin non-retail sales. Net sales in 2021, increased by approximately 5% over the two-year period, with EBITDA in the last two years in the low $500 million range compared to EBITDA of $422 million in fiscal 2019.”
Fitch noted that Flowers Foods is focused on several strategic initiatives to reengineer its product portfolio, ERP upgrade and core business processes, including e-commerce, autonomous planning, and bakery operations, simplify operations and improve digital capabilities. The company is pursuing several near-term initiatives primarily across operational efficiencies and procurement to generate incremental cost savings of $25 million to $35 million by 2022, the rating agency noted.
“The long-term portfolio strategy is expected to result in a shift to a greater percentage of the branded retail sales mix supported by share gains in underdeveloped geographies and segments combined with selective exits from low to no margin businesses,” Fitch said. “Flowers expects this strategic initiative to improve value realization and operational efficiencies that will drive meaningful margin improvements over the next few years. Fitch’s forecast assumes marginal improvement in margins given uncertainty in the operating environment, including inflation, demand elasticity, demand rebound potential and promotional environment.
“Flowers has also experienced margin pressure in the past despite strategic spending initiatives aimed at improving profitability. Fitch believes that if such headwinds increase materially over the next 12 to 24 months, Flowers’ initiatives should position the company well to help mitigate potential headwinds.”
Fitch said it expects Flowers Foods to take a “measured and disciplined approach” to long-term capital allocation, including bolt-on acquisitions. This approach could modestly increase leverage levels with recovery within 18 months, as with past acquisitions of DKB or Canyon, Fitch said, adding that Flowers Foods currently retains “higher than normal” levels of cash that could be used for acquisitions and/or share repurchases.
Fitch noted that Flowers Foods’ rating is in line with Grupo Bimbo, SAB de CV (BBB/Stable).
“Bimbo’s ratings reflect its strong position as a leading global producer of baked goods, leveraging an extensive distribution network with operations in Mexico, the United States, Canada, Latin America, Europe and, to a lesser extent, Asia and Africa,” Fitch said. “This reflects greater geographic diversification than Flower. As a result, Bimbo has significantly greater scale than Flower, demonstrated by revenue and EBITDA more than four times Flower. Bimbo has EBITDA margins of approximately 12% and gross leverage of approximately 2x.”