PIVOTAL

U.S. Equity Research

Food, Alcohol & Nutrition

Pivotal Research Group

November 16, 2015

FLO: A Deeper Look at the

Misclassification Suits and the Potential
Impacts to FLO
BOTTOM LINE: Flowers Foods has always been a powerhouse in the
packaged bread business. Weve long held the view that the company is
among the best, if not the best-managed, of the DSD (direct-store-delivery)
bakery operators. The company has a powerful and close-knit corporate culture.
It fosters this culture in many different ways we remember hearing ex-CEO
George Deese tell the story that maintenance workers and other non-baker staff
at the companys bakeries are outsourced to third party contractors. Flowers
treats entry to the team, the bakers, as a reward to these third-party individuals
if your good at your job cleaning and doing maintenance, Flowers might take
notice and hire you for the baking team, one of their non-union but otherwise
quite attractive jobs in the bakery. Its The Flowers Way.

Timothy S. Ramey, CFA

Similarly with the DSD route system Flowers delivery drivers were once
employees but in the 1980s Flowers launched an innovative plan to privatize
the routes creating independent operators - IOs. Flowers introduced a
structure where a driver could become an independent operator not an
employee, but actually buying their job, a distribution route, from the company
with a company-financed note. Flowers valued these routes at a one-size-fitsall formula of 10x trailing average weekly branded sales.
The driver could buy a route but the economics were structured such that they
could earn a living wage while paying down their distributor note out of the
weekly settlement with the company. Eventually, the drivers route note would
be paid down. The IO would develop equity as sales grew and the route was
paid down an attractive proposition for otherwise generally low-skilled labor.
If you were an IO in a growth area, your equity in the route would rise as your
branded sales rise. And the company promised to buy the route back at the
same multiple of branded sales (after five years), so you were creating equity
as you grew the route. Your route was your nest-egg perhaps your retirement
plan, without the tax advantages, PBGC insurance, and professional
management of a real retirement account.
Our discussion of the misclassification risks and history continues within.
We also attempt a pro-forma recast of the Flowers income statement under
the scenario where IOs are re-classified as employees. It results in pro-forma
EPS dropping to about $0.30-$0.35, in our view.
VALUATION: Flowers valuation remains unsustainably high in our view.
FLO trades at 24x our 2016 EPS estimate of $0.98 and 13.2x 2015 EV/EBITDA.
Further, our SELL rating is a call on poor category dynamics and weak center
of the store prospects in grocery. Given the risk from the exponential growth in
the class-actions, FLOs valuation is clearly excessive for the low-margin,
intensely competitive package bread category.
RISKS: Eleven class-action, up from three this time last year remain the
800-pound gorilla in the room. These suits have strong legal merit and pose
dramatic, perhaps existential risk to Flowers in our view. We see the likelihood
that there will be 20+ complaints a year from now; this is what Flowers Foods
will spend all of its time on and is the single issue of focus for these shares. We
might see only growing legal cost impacts in 2016, but we do expect many more
class-actions to be certified. Flowers can NEVER lose one of these and open
the floodgates.

212-514-4684
tim@pvtl.com

Flowers Foods (FLO)

RATING:

SELL

Previous:

SELL

Target Price:

$10.00

Previous:

$10.00

Price 11/16/15

$23.59

MARKET DATA
52-Week Hi-Low:
Market Cap
Avg. Daily Vol. (000s)

$18.12-$27.31

$4,990
1,920

INCOME DATA
Sales in Millions $
EPS
1Q
2Q
3Q
4Q
FY

2014A
$0.29
$0.21
$0.21
$0.20
$0.90

Sales
1Q
2Q
3Q
4Q
FY

2014A
$1153
$873
$845
$890
$3,749

2015E
$0.29A
$0.25A
$0.23A
$0.21
$0.98
2015E
$1146A
$889A
$885A
$900
$3,820

Prior

Prior

2016E
$0.28
$0.24
$0.23
$0.22
$0.98
2016E
$1175
$911
$908
$923
$3,916

BALANCE SHEET DATA

Cash ($M)
Debt ($M)
Net Debt
Net Debt/EBITDA
2015 EBITDA ($M)
EV/EBITDA
Dividend
Dividend Yield
Book Value/Share
As of 10/10/15

$8.8
$897
$888
2.0x
$447.2
13.2x
$0.58
2.15%
$5.79

Source: Pivotal Research Group

286 Madison Ave., 16th Floor

Pivotal Research Group
Important Disclosures Are Located In The Appendix

New York, NY 10017

Prior

Prior

Discussion of the Misclassification Issues

At the time of the startup of the IO system, FLO was a baking company operating in the Southeast only
right-to-work States where union representation is not at all powerful. The system was innovative, reduced
costs and created an entrepreneurial opportunity for the route drivers. Other bakers that operated in the
North or Midwest took note and in some cases copied the IO structure. In some cases, as with Earthgrains,
the publicly-traded baker out of St. Louis that Sara Lee acquired in 2001 (while I was VP of Strategy and
Corporate Development at Sara Lee), the ship had sailed and unions were highly entrenched and would
not allow the conversion of employee routes to the IO structure. At the time, Flowers enjoyed a 400 bp
margin advantage by my estimate, based on this innovative and unique structure.
Interstate Bakeries, at the time the largest baker in the U.S., had a union labor force and their high costs
led them to file Chapter 11 bankruptcy in 2004. The company emerged from bankruptcy as Hostess Brands,
but unfortunately, with the union structure still intact. Hostess went the way of a second trip to the
bankruptcy court, this time filing Chapter 7 liquidation in 2012. Flowers enjoyed a windfall from Hostess,
buying the now-closed plants of Hostess and the rights to the Wonder brand. It emerged stronger taking
meaningful share from the jump ball that existed when Hostess ceased to operate. This enriched Flowers
IOs as well their routes picked up sales and became more valuable. It also resulted in Flowers
restructuring routes, which the company does often. They buy back partial or entire territories from IOs,
revising territories boundaries, reselling the restructured routes.
While the drivers were independent the company really, and by necessity and culture, continued
to treat them as employees. The company would tell IOs in the same way that one would tell employees
that they would need to do this or that add a Dollar General store or Burger King to their routes, even
though a Dollar store or a Burger King would be an unprofitable stop for the IO. The Company competes
for bid business like schools, which have low payouts and if they win the business they will compel IOs to
deliver the product. Flowers Foods uses the threat of breach of the route agreement or the good industry
practice clause as a hammer to get IOs to comply with Flowers wishes and growth initiatives. Mostly this
system worked fine Flowers needed the control of an employee relationship over what were otherwise
independent contractors and it worked, for the most part.
The Company avoided IRS scrutiny because the IRS required Flowers to treat IOs as employees for
FICA and unemployment tax purposes the IRS views IOs as employees for FICA withholding purposes
since IOs have no investment in a facility (facility does not include the IOs truck or its intangible rights to
sell bread in a certain territory). Adopting this tax treatment required the IO to submit financial statements
so the Company could compute a FICA wage, giving the Company complete knowledge of profitability of
the IO. But it also gave the company cover from scrutiny by the IRS of the legitimacy of the independent
structure.
Not all routes are created equal. Some routes are quite profitable; some have too high a percentage of
private-label product or fast food unbranded which carries a much lower than average payout of 10% of
net revenues. Perhaps the route had one Winn-Dixie at the end of a long country road it was a route that
would never be very profitable, even if the Company gave you the territory. On average the payout for IOs
is in the 18% range. In the case of an expansion route a route into new territory where the company had
minimal existing presence, or the bad route with the Winn-Dixie at the end of a long country road, the
company would add a development allowance.
Development allowances are determined by the local distribution warehouse to encourage an IO to run a
route that was otherwise unprofitable. It is a mechanism to back into a weekly net pay for the driver that
would be acceptable to the driver and keep them on the route. And since the company requires financial
statements from IOs, Flowers can fine-tune IO income with the development allowance. It was, and
remains, a very clear mechanism for Flowers to manage the income of the independent operator. However,
the development allowance does not look like what two independent parties would do in a truly independent
relationship. It looks a lot like employment.
They can never lose. Occasionally, IOs would object to company demands and file suit against the
company. Much like the tobacco litigation of the 90s, Flowers took the point of view that they could never
lose one of these actions, and they never have. Mostly the actions were taken by small country lawyers on
behalf of one or two IOs and the company never let the suits go to trial they would settle the actions on

-2-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

the courthouse steps for fairly small amounts maybe a $100,000 payment and a non-disclosure
agreement. The we can never lose strategy worked. Flowers needed employee-like control over IOs
while still retaining the appearance of independence that was so key to their margins.
Flowers took other initiatives to help IOs in ways that look a lot like employee/employer relationships. IOs
(before the advent of Obamacare) had no real access to health care. Flowers set up a group policy for IOs
that they could opt-into just the way an employee would. Its hard to understand the standing that the
company had in this relationship in any way other than as an employer acting on behalf of employee in our
view.
There was likely a time during the past three decades where the IOs were, perhaps, independent.
Before the age of, pay-by-scan, national account teams employed by Flowers dedicated to Walmart, B-toB and the Flowers all-important handheld device. In that time, Flowers IOs exercised at least some control
over what went on in a grocery store. They could buttonhole a store manager and ask permission to set up
a cake display or perhaps pitch them on taking a new product. But with the advent of the handheld device
and B-to-B systems, more and more of those merchandising and product development initiatives were
handled by corporate negotiating directly with Walmart or Albertsons.
The IO was relegated to a delivery role only. Today IOs exercise virtually no control over what is
ostensibly an independent business. Flowers holds the control over who the IO will sell to; what the pricing
is, what the service levels will be, what the product assortment will be. All of these details of an IOs day
were dictated to the IO by the district managers memos or the orders pushed by corporate to the IOs
handheld device. Ultimately, technology disintermediated the independence of the IO. They just follow the
orders of the company, upon threat of breach of their IO agreement.
Another example of Flowers heavy-hand approach came from Flowers acquisitions. For instance, it
acquired Tastykake, and pushed a regional snack cake brand onto the IOs routes, even though the IO
knows the brand may have no real demand or relevance in its territory. Chocolate-covered cake doesnt
work all that well in the hot South in the summer.
Flowers continued its geographic expansion pushing into new states with a mixture of acquisitions and
geographic expansion. What was once a company servicing 19 states in the southeast, servicing 38% of
the U.S. population, became the Flowers of today, serving 83% of the U.S. Population in at least 38 States.
That put Flowers into States like California and Maine that had very different views of the rights of labor.
The seeds of Flowers misclassification problems today were sown by the rapid expansion into new markets.
The appearance of the independence of IOs took its first body blow last May with Rehberg vs. Flowers
Foods. Rehberg was filed in September 2012 and was certified as a class-action suit in March 2015 over
the companys strenuous opposition. Flowers lost its appeal of the class-action certification in May and
finally, the risk of a suit that they really might lose and one that represented a class of 200 IOs was on
the table. This was a case that would go to trial and is on that path today. Oral arguments on the motions
for summary judgment were heard by the court last week.
Plaintiffs attorneys are great at smelling blood in the water, and have sensed Flowers vulnerability.
Since Rehberg was certified as a class-action, a total of eight other misclassification class-actions have
been filed. The floodgates have opened and Flowers now has no way to put the genie back in the bottle.
We would argue that the plaintiffs attorneys for the 2015 suits are a cut above the country lawyer that
settled on the courthouse steps for $100,000 in days gone by. But we would also note that none have taken
an aggressive, multi-State mesothelioma like approach. There isnt a single law firm that is recruiting
defendants in a large multi-State, organized way. That outcome, however, may be in Flowers future. There
are 5,200 independent route drivers, we estimate that not more than 800 of them are represented by the
11 misclassification class-action suits that exist today. There is still a lot of opportunity for aggressive trial
lawyers in the misclassification business.
Reasonable people can disagree about the path forward. However, the view of labor rights in the
expansion states, government policy, such as the DOL position recently announced and particularly the
State law in pro-labor States favor Flowers losing many if not all of the misclassification cases. The view of
labor is different today than it was ten years ago. Some would argue that Flowers heavy-handed approach
to its IOs has created a toxic environment that is ripe for enlisting new IOs as plaintiffs.

-3-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

If Flowers loses, it will lose big, in our opinion. It goes back to the notion that the company has really
bet the farm on maintaining the status quo. A reasonable analyst would have a hard time taking that bet,
however. We might be early, we might be wrong as to timing, but we dont believe we are wrong as to the
ultimate outcome.
Here are the risks to the Flowers model that we cite:

If Flowers loses, it will force re-conversion of the routes from independent to companyowned. From a balance sheet perspective that has two major impacts. 1) the $180 million of
distributor notes on the asset side of the balance sheet will cease to exist. 2) Flowers will be
compelled under their agreements with distributors to buy back the routes at a formulaic price of
10x trailing average weekly branded sales. Flowers had $471 million of branded DSD sales in the
12-week period ending October 10th. Thus one week would be $39.3 million, or $47 million when
grossed up for the distributors margin. 10x this number is $471 million. 5,200 of the companys
5,760 routes are independent. Doing the math, that puts the route buyback at $425 million,
adjusting for the fact that 90% of the routes are independent. Back out the distributor notes
(obligations the drivers have to the company) and the conditional liability here is $245 million. Some
who are better accountants than I would suggest that this $425 million should be carried on the
current balance sheet as a contingent liability after all the company has a contractual obligation
to buy back the routes at the formula price. The company holds a $20.5 million asset for distributor
territories held for sale. This would be eliminated as an asset. Also, roughly $50,000 per truck ($260
million) would be bought back and would end up as a liability on the balance sheet to cover all the
leased trucks IOs have obtained.

The major balance sheet impact will be the awards to the IOs, and the attorneys fees.
Flowers will have losses ranging into the hundreds of millions of dollars due to awards for back
pay, overtime, workmans comp and punitive awards. These are not easily estimable but are not
small. We estimate $500 million to $1.0 billion as a reasonable bracket of risk. That would put the
average award to each IO in the $100-$200k range quite reasonable when there would be a
multi-year lookback at overtime, medical and other costs that rightfully should have been borne by
the company not the IO. Also, it may create issues for the IRS qualified status of FLO benefit plans
(defined benefit, 401(k), health care, etc.). It is not at all ambiguous that if IOs are classified as
employees, Flowers will have to extend the benefits that it currently affords employees to this new
tranche of employees.

With regard to Income statement adjustments, we think it likely that the current 8.5% EBIT
margin would be reduced substantially by a reclassification of IOs to employees. Flowers total
compensation paid to IOs is 15.9% of sales through the DSD segment, which in 2014 was $3.08
billion or $490 million. Divide that by 5,200 routes and you see that the average route had $94,000
of gross revenue. In our previous work published on May 26th we guesstimate that the real take
home pay of the average driver is closer to $50,000 on a 60+ hour work week. Converting these
routes to employees would have major impacts. Workers comp insurance; health insurance;
overtime; sick leave; vacation and family leave are all benefits that the company would have to
provide that it does not now. The costs to buy, or lease, and operate delivery trucks will become a
Flowers expense. Its easy to see how this could amount to a 50%+ load on the base compensation
of distributors. Thats likely to be a number in the $130 million range or about 3.3% of total sales.
Add to that the loss of the distributor note income of $22 million and we are getting to real numbers.

Add to this the cost of financing the perhaps $750 million to $1.25 billion cost of buying back
routes, trucks, damages, back pay, legal fees of unwinding the IO structure. Assume that FLO
could continue to borrow investment grade rates of say 4.5% it would add $33 - $56 million to
interest expense. Eliminate the $22 million of distributor note income. As a single point estimate
we assume that EPS pro forma for the conversion to employee route drivers would put 2016 EPS
at $0.32 compared to our current $0.98 estimate. (see below).

-4-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

Flowers Foods, Incorporated

Quarterly Income Statement, Pro Forma for Employee Conversion
($, millions except per share items)
---------------------- 2016 E ---------------------Q1-E
Q2-E
3Q-E
Q4-E
December Fiscal Year

Revenue
Direct-Store-Delivery
y-o-y % chg.
Warehouse Delivery
y-o-y % chg.
Total Revenue
y-o-y % chg.
Sales Guidance
Cost of Goods Sold
Gross Profit
Gross Margin
Additional Expense for Employment costs
Depreciation & Amortization
Selling, Dist. & Admin. Expenses
Selling/Dist/Admin : Sales
Segment Operating Profit
Direct-Store-Delivery
Operating margin
Warehouse Delivery
Operating margin
Corporate Expense
Total Operating Income
Operating margin
y-o-y % chg.

YR

4/23/16

7/16/16

10/8/16

12/31/16

995.2
3.0%
179.9
0.0%
1,175.1
2.5%

774.6
3.0%
136.8
0.0%
911.4
2.5%

768.7
3.0%
139.0
0.0%
907.7
2.5%

787.5
3.0%
135.1
0.0%
922.6
2.5%

3,325.9
3.0%
590.8
0.0%
3,916.7
2.5%

604.0

470.3

472.0

479.8

2,026.0

571.1
48.6%

441.1
48.4%

435.7
48.0%

442.9
48.0%

1,890.7
48.3%

32.5

32.5

32.5

32.5

130.0

44.0

32.0

32.0

32.0

140.0

433.6
36.9%

328.1
36.0%

326.8
36.0%

336.8
36.5%

1,425.2
36.4%

70.0
7.0%
16.2
9.0%
(25.2)

49.7
6.4%
13.0
9.5%
(14.2)

48.4
6.3%
13.5
9.7%
(17.5)

48.0
6.1%
12.8
9.5%
(19.3)

216.2
6.5%
55.5
9.4%
(76.1)

61.0
5.2%
-36.9%

48.5
5.3%
-41.1%

44.4
4.9%
-41.1%

41.6
4.5%
-41.1%

185.5
4.7%
-42.9%

Current interest expense

11.3

11.3

11.3

11.3

45.0

Eliminte distributor note income

(5.5)

(5.5)

(5.5)

(5.5)

(22.0)

Interest expense on balance sheet impacts

Pretax Income

11.1
38.6

11.1
26.1

11.1
22.0

11.1
19.2

44.5
106.0

13.4
34.8%

9.1
34.8%

7.7
34.8%

6.7
34.8%

36.9
34.8%

25.2

17.0

14.4

12.5

69.1

Diluted EPS, reported GAAP

Adjusted Net Income
y-o-y % chg.

$0.12
25.2
-59.0%

$0.08
17.0
-68.4%

$0.07
14.4
-70.1%

$0.06
12.5
-72.1%

$0.32
69.1
-66.8%

EBITDA
y-o-y % chg.

93.9
-31.2%

69.4
-37.3%

65.3
-35.1%

62.5
-37.3%

291.0
-34.9%

$1.89

$1.70

$1.54

$1.36

$1.36

$0.12
-59.2%

$0.08
-68.6%

$0.07
-70.2%

$0.06
-72.1%

$0.32
-66.9%

213.8

213.8

213.6

213.5

213.7

$0.34

$0.28

$0.26

$0.25

$1.13

Income Tax
Tax rate
Net Income, reported GAAP

EBITDA/share, trailing 4 qtrs

Diluted EPS, Adjusted Operating
y-o-y % chg.
Avg. Diluted Shares Out.
Consensus as of 11/5/15

-5-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

So its right to say that Flowers can never lose one of these suits. Doing so would have huge impacts
on the balance sheet and the income statement. If you are comfortable with the idea that Flowers can
thread this needle, stay long and strong. If not, we advocate SELL with a price target of $10 or lower.

Valuation
We believe Flowers valuation is inconsistent with its existential risk from the misclassification class-actions
and its overall growth prospects. The company positions itself as a double-digit grower but with the
exception of the windfall profits that the entire industry enjoyed as a result of Hostess liquidation, there has
not been much real growth at FLO for five+ years. This is a low margin business that is significantly
pressured by the high proportion of private label in the business. The poor performance of the packaged
foods producers recently in the center of the grocery store and the weakening retail environment for food
retailers has to shape the trajectory for the DSD bakery business and therefore FLO.

Risks
The major risk remains of recasting the business model should the IO model be declared unfair under labor
law. These suits are proliferating and have real merit in our opinion.
Eleven class-action, up from three this time last year remain the 800-pound gorilla in the room. The
company is not talking much about these suits nor are they acknowledging the risk as meaningful. They
didnt acknowledge them at all until May 28th. These suits have strong legal merit and pose existential risk
to Flowers. We see the likelihood that there will be 20+ complaints a year from now; this is what Flowers
Foods will spend all of its time on and is the single issue of focus for these shares. We might see only
growing legal cost impacts in 2016, but we do expect many more class-actions to be certified. As one
knowledgeable individual put it, Flowers can NEVER lose one of these and open the floodgates.
Flowers is conservatively managed and reasonably capitalized. Its products are basic consumer staples
gluten may be under pressure but bread is not likely to go away anytime soon. So there is low business
risk from end markets. The industry has consolidated meaningfully, in part because of the two bankruptcies
by Hostess Foods. So there is enough risk in the business that, if improperly capitalized (as Hostess was),
you could lose the business. The risks are more macro in nature. Dry grocery generally is under pressure,
DSD bakery is impacted. Gluten-free is a meaningful consumer trend; Protein diets have hurt carb-heavy
bread. At present commodity markets are favorable for margins but higher wheat, eggs, soybean oil and
natural gas would be a risk to margins.

Statement from the 10-Q on Misclassification Suits

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and
proceedings, which are being handled and defended in the ordinary course of business. While the company is unable
to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the
ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition,
results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in
a particular future fiscal period.
The companys facilities are subject to various federal, state and local laws and regulations regarding the discharge of
material into the environment and the protection of the environment in other ways. The company is not a party to any
material proceedings arising under these regulations. The company believes that compliance with existing
environmental laws and regulations will not materially affect the consolidated financial condition, results of operations,
cash flows or the competitive position of the company. The company believes it is currently in substantial compliance
with all material environmental regulations affecting the company and its properties.
On September 12, 2012, a complaint was filed in the U.S. District Court for the Western District of North Carolina
(Charlotte Division) by Scott Rehberg, Willard Allen Riley and Mario Ronchetti against the company and its subsidiary,
Flowers Baking Company of Jamestown, LLC. Plaintiffs are or were distributors of our Jamestown subsidiary who
contend they were misclassified as independent contractors. The action sought class certification on behalf of a class
comprised of independent distributors of our Jamestown subsidiary who are classified as independent contractors. In
March 2013, the court conditionally certified the class action for claims under the Fair Labor Standards Act (FLSA).
On March 23, 2015, the court re-affirmed its FLSA certification decision and also certified claims under state law.

-6-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

At this time, the company is also aware of ten other complaints alleging misclassification claims that have been filed.
The company and/or its respective subsidiaries are vigorously defending these lawsuits. Given the stage of the
complaints and the claims and issues presented, the company cannot reasonably estimate at this time the possible
loss or range of loss, if any, that may arise from the unresolved lawsuits.

Current Active Misclassification Class Action Suits

Date Filed
10/26/2015
10/21/2015
9/29/2015
9/28/2015
7/20/2015
7/7/2015
7/2/2015
5/12/2015
6/10/2013
9/12/2012
7/2/2007

-7-

Name
Soares, et al v. Flowers Foods Inc. et al
Richard, et al v. Flowers Foods Inc. et al
Bowden v. Flowers Foods Inc. et al
Brownfield et al v. Flowers Baking Co. of CA. LLC
Coyle v. Flowers Foods Inc. et al
Martinez et al v. Flowers Foods, Inc. et al
Stewart et al v. Flowers Foods, Inc. et al
Porreca et al v. Flowers Baking Co. of CA. et al
Meredith v. Sara Lee Fresh, Inc. et al
Rehberg et al v. Flowers Foods, Inc. et al
Morrow et al v. Flowers Foods, Inc. et al

Court
US District Court CA
US District Court LA
US District Court MA
CA Eastern District
AZ District
CA Central District
TN Western District
CA Eastern District
CA Northern District
NC Western District
AL Middle District

Timothy S. Ramey 212-514-4684

Case Number
5:15-cv-04918
6:15-cv-02557
1:15-cv-13464
2:15-cv-02034
2:2015cv01372
2:2015cv05112
1:2015cv01162
1:15cv00732
4:13cv02649
3:2012cv00596
3:2007cv00617

Claims
CA law
LA law/ FSLA
MA law
CA law
AZ law
CA law
FLSA
CA law
CA law
FLSA
FLSA

Pivotal Research Group

FLO: Income Statement

Flowers Foods, Incorporated
Quarterly Income Statement
($, millions except per share items)
---------------------- 2014* E ---------------------Q1-A
Q2-A
Q3-A
Q4-A*
Decem ber Fiscal Year

Revenue
Direct-Store-Delivery
y-o-y % chg.
Warehouse Delivery
y-o-y % chg.
Total Revenue
y-o-y % chg.
Sales Guidance
Cost of Goods Sold
Gross Profit
Gross Margin
Depreciation & Amortization

4/19/14

7/12/14

10/4/14

1/3/15

963.1
4.4%
190.8
-8.4%
1,153.9
2.0%

736.4
-0.6%
136.4
-13.3%
872.8
-2.8%

713.8
-2.2%
131.1
-11.8%
844.9
-3.8%

742.3
5.2%
135.1
-2.3%
877.4
4.0%

YR

3,155.5
1.8%
593.4
-9.1%
3,748.9
-0.1%

---------------------- 2015 E ---------------------Q1-A

Q2-A
3Q-E
Q4-E
4/25/15

7/18/15

10/10/15

1/2/16

966.2
0.3%
179.9
-5.7%
1,146.1
-0.7%

752.0
2.1%
136.8
0.3%
888.8
1.8%

746.3
4.6%
139.0
6.0%
885.3
4.8%

764.6
3.0%
135.1
0.0%
899.7
2.5%

YR

3,229.1
2.3%
590.8
-0.4%
3,819.9
1.9%

---------------------- 2016 E ---------------------Q1-E

Q2-E
3Q-E
Q4-E
4/23/16

7/16/16

10/8/16

12/31/16

995.2
3.0%
179.9
0.0%
1,175.1
2.5%

774.6
3.0%
136.8
0.0%
911.4
2.5%

768.7
3.0%
139.0
0.0%
907.7
2.5%

787.5
3.0%
135.1
0.0%
922.6
2.5%

YR

3,325.9
3.0%
590.8
0.0%
3,916.7
2.5%

$3.818-$3.861

595.9

458.0

443.0

453.8

1,950.6

585.9

457.3

464.0

469.6

1,976.8

604.0

470.3

472.0

479.8

2,026.0

558.0
48.4%

414.8
47.5%

401.9
47.6%

423.6
48.3%

1,798.3
48.0%

560.2
48.9%

431.5
48.6%

421.3
47.6%

430.0
47.8%

1,843.0
48.2%

571.1
48.6%

441.1
48.4%

435.7
48.0%

442.9
48.0%

1,890.7
48.3%

39.3

29.9

29.5

30.3

129.0

39.8

30.5

29.4

31.0

130.7

44.0

32.0

32.0

32.0

140.0

Selling, Dist. & Admin. Expenses

Selling/Dist/Admin : Sales

420.5
36.4%

315.0
36.1%

302.0
35.7%

330.7
37.7%

1,368.2
36.5%

423.8
37.0%

318.8
35.9%

316.4
35.7%

328.4
36.5%

1,387.3
36.3%

433.6
36.9%

328.1
36.0%

326.8
36.0%

336.8
36.5%

1,425.2
36.4%

Segment Operating Profit

Direct-Store-Delivery
Operating margin
Warehouse Delivery
Operating margin
Corporate Expense

96.8
10.0%
14.1
7.4%
(12.7)

66.9
9.1%
13.5
9.9%
(10.5)

67.7
9.5%
11.8
9.0%
(9.2)

57.3
7.7%
12.0
8.9%
(6.6)

288.7
9.1%
51.5
8.7%
(39.0)

99.2
10.3%
16.3
9.1%
(18.9)

80.3
10.7%
14.0
10.2%
(12.0)

74.5
10.0%
11.4
8.2%
(10.5)

72.6
9.5%
11.5
8.5%
(13.5)

326.7
10.1%
53.2
9.0%
(54.8)

102.5
10.3%
16.2
9.0%
(25.2)

82.1
10.6%
13.0
9.5%
(14.1)

80.7
10.5%
13.5
9.7%
(17.3)

80.3
10.2%
12.8
9.5%
(19.1)

345.6
10.4%
55.5
9.4%
(75.6)

Total Operating Income

Operating margin
y-o-y % chg.

98.2
8.5%
-6.0%

69.9
8.0%
-13.3%

70.4
8.3%
16.6%

62.7
7.1%
9.8%

301.1
8.0%
-0.4%

96.6
8.4%
-1.6%

82.3
9.3%
17.8%

75.5
8.5%
7.2%

70.7
7.9%
12.7%

325.1
8.5%
7.9%

93.5
8.0%
-3.2%

81.0
8.9%
-1.6%

76.9
8.5%
1.9%

74.1
8.0%
4.9%

325.5
8.3%
0.1%

3.2
95.0

1.7
68.1

1.4
69.0

1.0
61.7

7.3
293.8

1.6
95.0

0.9
81.5

0.9
74.6

1.8
68.9

5.1
319.9

1.5
92.0

0.8
80.2

0.8
76.1

0.8
73.3

3.9
321.6

34.0
35.7%

23.2
34.0%

24.4
35.3%

19.9
32.3%

101.5
34.5%

33.6
35.3%

27.5
33.7%

26.5
35.5%

24.0
34.8%

111.5
34.8%

32.0
34.8%

27.9
34.8%

26.5
34.8%

25.5
34.8%

111.9
34.8%

Interest Expense, net

Pretax Income
Income Tax
Tax rate
Net Income, reported GAAP

61.0

42.1

44.6

28.1

175.8

61.4

51.8

43.8

42.9

199.9

60.0

52.3

49.6

47.8

209.7

Diluted EPS, reported GAAP

$0.29

$0.20

$0.21

$0.13

$0.82

$0.29

$0.24

$0.21

$0.20

$0.94

$0.28

$0.24

$0.23

$0.22

$0.98

Non-Recurring Items (net of tax)

Adjusted Net Income
y-o-y % chg.

61.0
-5.9%

(2.9)
45.0
-10.3%

44.6
2.8%

(13.7)
41.7
8.3%

(16.6)
192.3
-2.3%

61.4
0.7%

(2.2)
54.0
20.1%

(4.3)
48.1
7.9%

(2.0)
44.9
7.6%

(8.5)
208.4
8.4%

60.0
-2.4%

52.3
-3.1%

49.6
3.2%

47.8
6.4%

0.0
209.7
0.6%

137.5
-26.0%

96.9
-5.6%

99.9
16.6%

79.3
-7.6%

413.5
-10.1%

136.4
-0.8%

110.6
14.1%

100.6
0.7%

99.7
25.6%

447.2
8.1%

137.5
0.8%

113.0
2.2%

108.9
8.3%

106.1
6.5%

465.5
4.1%

EBITDA/share, trailing 4 qtrs

$1.93

$1.91

$1.97

$1.94

$1.94

$1.94

$2.00

$2.00

$2.09

$2.09

$2.10

$2.11

$2.15

$2.18

$2.18

Diluted EPS, Adjusted Operating

y-o-y % chg.

$0.29
-6.8%

$0.21
-10.7%

$0.21
2.4%

$0.20
8.1%

$0.90
-0.8%

$0.29
0.7%

$0.25
20.1%

$0.23
7.8%

$0.21
7.4%

$0.98
8.4%

$0.28
-2.9%

$0.24
-3.6%

$0.23
3.0%

$0.22
6.4%

$0.98
0.3%

Avg. Diluted Shares Out.

212.8

212.9

213.2

213.1

213.1

212.7

212.9

213.3

213.5

213.1

213.8

213.8

213.6

213.5

213.7

$0.23

$0.22

$1.00

$0.34

$0.28

$0.26

$0.25

$1.13

EBITDA
y-o-y % chg.

Consensus as of 11/5/15
Company Guidance as of 8/12/14
Company Guidance as of 11/12/14
Company Guidance as of 02/12/15
Company Guidance as of 05/28/15
Company Guidance as of 08/12/15
Company Guidance as of 11/11/15
* 13-week quarter, 53 week year

$0.92-$0.98
$0.86-$0.90
$0.96-$1.01
$0.96-$1.01
$0.96-$1.01
$0.96-$0.98

Source: Pivotal Research, Company Reports

-8-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

FLO: Balance Sheet

Flowers Foods, Incorporated
Quarterly Balance Sheet
($, millions)
10/10/2015 1/3/2015 % Change
Cash and Cash Equivalents
Other Current Assets
Total Current Assets
Net PP&E
Distributor Notes Receivable
Other Assets
Cost in Excess of Net Tangible Assets, net
Total Assets

10/10/2015

$8.8
504.5
513.3

$7.5
453.0
460.6

16.7%
11.4%
11.4%

Current Portion of Long Term Debt

Other Current Liabilities
Total Current Liabilities

$784.6
162.4
46.1
1,245.8
2,752.2

$807.5
161.9
51.1
927.9
2,409.0

-2.8%
0.3%
-9.8%
34.3%
14.2%

Long Term Debt and Capital Leases

Other Liabilities
Total Liabilities
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity

1/3/2015 % Change

53.5
328.5
381.9

34.5
281.1
315.6

55.0%
16.9%
21.0%

843.6
298.3
1,523.8
1,228.4
2,752.2

728.9
241.4
1,285.9
1,123.0
2,409.0

15.7%
23.5%
18.5%
9.4%
14.2%

Flowers Foods, Incorporated

Annual Cash Flow Statement
($, millions)
2013 A
$235.8
118.5

Net Income
D&A
Changes in Working Capital
Operating Cash Flow
354.3
CAPEX
Free Cash Flow
Free Cash Per Share
FCF Yield

99.2
255.1
1.23
4.6%

2014 A
$175.8
129.0

2015 E
$199.9
130.7

304.7

330.6

83.8
221.0

90.0
240.6

1.04
3.9%

1.13
4.2%

Source: Company Reports and Pivotal Research Estimates

-9-

Timothy S. Ramey 212-514-4684

Pivotal Research Group

Timothy S. Ramey, CFA

Food, Alcohol & Nutrition - Pivotal Research Group

11/16/2015

P/E Ratio

Price

Rating

Target % to Market
Price Target Cap. 2014A 2015E 2016E 2015E 2016E

Price /
Sales

2015 EV
Net
/
Debt /
Book Price /
EBITDA EBITDA Value Book

PEG

Normal
Growth

Div.
Yield

Alcohol
BF'B

Brown-Forman Corp.

$102.42

BUY

$125.00 22.0% 21,567

$3.06

$3.20

$3.40

32.0

30.1

5.3

20.7

0.8

$9.05

11.3

3.3

9%

1.2%

STZ

Constellation Brands, Inc. $132.20

BUY

$150.00 13.5% 25,577

$3.62

$4.40

$5.10

30.0

25.9

4.2

17.9

3.9

$31.34

4.2

2.0

13%

0.9%

Food Companies
DMND Diamond Foods, Inc.

$40.79 HOLD

$41.00

0.5%

1,305

$0.64

$1.09

$1.24

37.4

32.9

1.5

16.8

5.3

$9.64

4.2

4.1

8%

0.0%

FLO

$23.51 SELL

$10.00 -57.5%

4,988

$0.90

$0.97

$0.97

24.2

24.2

1.3

13.4

2.2

$5.79

4.1

24.2

1%

2.5%

POST Post Holdings, Inc.

$59.72

BUY

$83.00 39.0%

3,703

n/a

n/a

n/a

n/a

n/a

0.8

12.0

6.4

$43.05

1.4

n/a

10%

0.0%

TSN

$43.10

BUY

$55.00 27.6% 16,680

$2.94

$3.20

$3.50

13.5

12.3

0.4

7.4

2.1

$25.02

1.7

1.2

10%

0.9%

Flowers Foods. Inc

Tyson Foods, Inc.

Nutrition
BCPC Balchem Corporation

$62.71 HOLD

$65.00

3.7%

1,975

$2.18

$2.55

$2.75

24.6

22.8

3.4

13.2

1.4

$13.91

4.5

1.9

12%

0.5%

HLF

Herbalife, Ltd.

$53.89

BUY

$85.00 57.7%

4,559

$5.93

$4.80

$4.75

11.2

11.3

1.0

6.8

1.1

-$1.54

-34.9

1.1

10%

0.0%

NUS

Nu Skin Enterprises, Inc.

$33.00

BUY

$75.00 127.3%

1,990

$4.16

$3.80

$4.30

8.7

7.7

0.8

4.7

-0.1

$15.32

2.2

0.8

10%

4.2%

OME

Omega Protein Corp.

$22.50 HOLD

$19.00 -15.6%

500

$1.37

$1.85

$2.05

12.2

11.0

1.3

5.8

0.3

$13.22

1.7

1.1

10%

0.0%

$200.00 53.8%

1,656

$5.60

$7.35

$8.85

17.7

14.7

1.8

9.5

-1.1

$24.61

5.3

1.0

15%

0.0%

21.2

19.3

2.0

11.6

4.1

10%

USNA USANA Health Sci., Inc. $130.07

BUY

Averages

7,682

Source: Company reports; Pivotal Research Group estimates

- 10 -

Timothy S. Ramey 212-514-4684

Pivotal Research Group

Appendix: Important Disclosures

Analyst Certification
I, Timothy S. Ramey, hereby certify that the views expressed in this research report accurately reflect my
personal views about the subject company and their securities. I further certify that I have not received and
will not receive direct or indirect compensation related to specific recommendations or views contained in
this research report.
Legal Disclaimers
Pivotal Research Group LLC is an independent equity research company and is neither a broker dealer nor
offers investment banking services. Pivotal Research Group LLC is not a market maker for any securities,
does not hold any securities positions, and does not seek compensation for investment banking services.
The analyst preparing this report does not own any securities of the subject company and does not receive
any compensation directly or indirectly from investment banking services.
Stock Ratings
Pivotal Research Group LLC assigns one of three ratings based on an expectation of absolute total return
(price change plus dividends) over a twelve month time frame. The ratings are based on the following
criteria:
BUY: The security is expected to have an absolute return in excess of 15%.
HOLD: The security is expected to have an absolute return of between plus and minus 15%.
SELL: The security is expected to have an absolute return less than minus 15%.
Ratings Distribution
Pivotal Research LLC currently provides research coverage of 48 companies, of which 58% are rated BUY,
31% are rated HOLD, 8% are rated SELL, and 2% are not rated. Our company does not offer investment
banking services. This data is accurate as-of 11/16/15.
Price Chart and Target Price History

Other Disclaimers
Information contained in this report has been prepared from sources that are believed to be reliable and
accurate but are not guaranteed by us and do not represent a complete summary or statement of all
available data. Additional information is available upon request. Furthermore, information and opinions
expressed are subject to change without notice and we are under no obligation to inform you of such
change.
This report is has been prepared solely for our institutional clients. Ratings and target prices do not take
into account the particular investment objectives, financial and/or tax situation, or needs of individual
investors. Investment decisions should take into account all available information, not just that which is
contained in this report. Furthermore, nothing contained in this report should be considered an offer or
solicitation by Pivotal Research Group LLC to buy or sell any securities or other financial instruments. Past

- 11 -

Timothy S. Ramey 212-514-4684

Pivotal Research Group

performance is not indicative of future performance and estimates of future performance contained in this
report are based on assumptions that may not be realized.
Material in this report, except that which is supplied by third parties, is Copyright 2015, by Pivotal
Research LLC. All rights reserved. No portion may be reproduced, sold, or redistributed in any form without
express written consent of Pivotal Research Group LLC.
Commission Sharing Arrangements
Pivotal Research Group LLC has commission sharing arrangements (CSA) with numerous broker-dealers.
Please contact Jeff Shelton at 212-514-4681 for further information.
Additional Information Available Upon Request

- 12 -

Timothy S. Ramey 212-514-4684

Pivotal Research Group