FLO - Grupo Bimbo Executing Where It Matters But Consumer Habits Are Shifting

2023-03-07 09:02:15 ET

Summary

• Grupo Bimbo has been executing well across its operations, including improved product development, manufacturing, and distribution efficiency.
• Nielsen data suggests that customers are tapped out on prices, and increasingly shifting toward private label breads and sweet snacks to offset food cost inflation.
• There is scope for further market share gains and operational improvement, but Bimbo's valuation looks pretty fair today.

It's been a little while since I've updated my thoughts on Grupo Bimbo ( OTCPK:GRBMF ) ( OTCPK:BMBOY ) (BIMBOA.MX), but I'm pleased to say that management has been executing well on the action items I noted in my prior articles , including further brand innovation, market share gains in higher-value categories, and operating efficiency improvements. At this point, the plan going forward could simply be "more of that, please" and I'd be happy.

These shares are up more than 130% from my last article on the company, which is pretty remarkable performance relative to the group, as well as closer peers like Flowers ( FLO ), Hostess ( TWNK ), and Mondelez ( MDLZ ). The issue now is simply that valuation - even with mid-single-digit revenue growth and further free cash flow margin improvement, the best I can see on valuation is maybe 10% near-term upside from here. That's not bad for a consumer staple, but I wouldn't expect the same sort of returns seen over the past couple of years.

On Target Results, But Some Margin Pressures Remain Evident

Bimbo's fourth quarter was fine - a small revenue miss on forex isn't a big deal and the company met expectations for EBITDA, with a healthy guide for both revenue and EBITDA for 2023, albeit with higher capex as well.

Revenue rose 15% year over year and 6% quarter over quarter as reported. Sales in Mexico were up 17% yoy and 4% qoq, while the U.S. and Canada was up 16% yoy (up 22% in local currency) and 9% qoq. These two segments comprise about 85% of the business, so they'll mostly be my focus.

Gross margin declined 120bp yoy, with Mexico down 40bp to 53.7% and North America down 190bp to 52.3%. Higher input costs (including pretty robust crop prices) drove that result, and the company is seeing relatively less pricing leverage in recent months as demand elasticity increases.

Adjusted EBITDA rose 12% yoy and 1% qoq, with margin down 40bp yoy and 70bp qoq to 13.4%. EBITDA in the Mexican operations fell 3% yoy and 5% qoq, with margin down 370bp yoy to 17.4%, while North American results improved 14% yoy and 3% qoq, with margin down 10bp to 11.1%. Both the LatAm and European operations continue to be margin-dilutive, with EBTIDA margins of 9% (up 290bp) in LatAm and 8.4% (down 60bp) in Europe.

Pricing And Availability Is Driving More Private Label Share Growth

One of the less-positive trends at Bimbo lately is weakening market share data as per the monthly Nielsen reports. Bimbo's overall sales were up 10% in January (versus 11% industry growth), following 16.7% growth in December, 15.4% growth in November, 16.3% growth in October, and 17.6% growth in September. Over the same time period (September to January), year-over-year volume has gone from flat to down 8%, as the customer behavior is becoming increasingly elastic as high prices persist.

In the bread category, for instance, volume was down 10% for Bimbo against a 6% industry decline, while sweet snacks volume was down 11% versus industry volume was down about 2%. The good news, if you can call it that, is that these losses are coming largely to the benefit of private label. I believe customers are trading down where they can to save money given significant food cost inflation, but I also believe some of this switch has been powered by improved availability - for some time, many producers largely curtailed their private label production as they couldn't satisfy demand for their own brands, but that situation has started to normalize, so customers once again have more/better private label options.

There are two valid ways to look at this. In the short term, this is definitely a risk to Bimbo's momentum in North America, but it's not really benefiting Flowers, Hostess, Mondelez or other rivals. Longer term, though, the company has been gaining share across most of its categories, and particularly in higher-value categories like specialty breads, sweet snacks, and salty snacks. That, in turn, has helped margins.

Can Operational Improvements Still Drive Leverage?

I've been impressed with what Bimbo has achieved in its U.S. operations over the last several years. In 2016, the North American operations were producing sub-10% EBITDA margins, but have since improved to the 11%-12% range.

There have been multiple drivers here. Increased sales of premium products have helped, as has a portfolio pruning process that eliminated less popular items. That has helped maximize capacity utilization for higher-value products, and the company has also done a lot of work on plant efficiency (automation, et al) and logistics improvement. By consolidating sales centers and reconfiguring delivery routes, Bimbo has reduced empty miles and better leveraged its existing structure.

I think there is still room for improvement, at both the plant-level and in the logistics system, but I think further progress will be more incremental. I also see room for improvement across the European and Latin American operations, but scale will be a limiting factor in many markets, and Bimbo may have to wait for customer behaviors to change (favoring branded packaged products over the products of the local bakery).

As far as scale-versus-efficiency goes, however, I suggest investors keep their expectations in check. Bimbo has always been highly acquisitive and willing to plan on long timelines - waiting years for markets and market opportunities to develop. While the company has shown some willingness of late to exit sub-scale businesses (selling Ricolino to Mondelez), don't expect management to start looking for under-earning operations in Europe or LatAm to put up for sale, or at least not in large numbers.

The Outlook

Bimbo has outperformed my expectations on product development, and the company has certainly gotten a boost from pricing leverage. With strong momentum in specialty categories within breads and snack products, I'm comfortable with a long-term revenue growth rate closer to 4%. On the margin side, I expect improvement over time toward the mid-to-high single-digits, driving high single-digit adjusted FCF growth.

Between discounted cash flow and margin/return-driven EV/EBIITDA, I think Bimbo is likely no more than 10% undervalued in the near term and likely priced for a high single-digit long-term annualized return. That's arguably not bad for an established consumer staples company, and I suppose there is upside to outperform on revenue.

The Bottom Line

I liked Bimbo before and I still like it now, though the share price performance and valuation make it a more marginal call for me. Given increased elasticity in consumer habits and higher Street expectations, this is a name I'd rather try to pick up again at lower levels.

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