Moody's adjusts Flowers Foods outlook to negative due to leverage concerns

Investing.com – Moody’s has confirmed Flowers Foods’ Baa3 long-term issuer and senior unsecured ratings, while changing the outlook from stable to negative, citing expectations of sustained high leverage over the next 12-18 months.

The rating agency noted that Flowers Foods’ debt to EBITDA ratio for fiscal 2025 is in the high 3x range, above its median of 3x at the time of the February 2025 acquisition of Simple Mills, and significantly higher than the pre-transaction low of 2x.

Deleveraging has been slower than expected due to margin pressures from category softness. Shifts by consumers toward premium and value products have negatively impacted Flowers, which has higher exposure in traditional bread. The company’s profit margins are also under pressure from increased promotional activity and rising tariff-related costs.

Moody’s expects that, despite productivity initiatives and innovation investments, sales and EBITDA will continue to decline in 2026 due to ongoing consumer headwinds and cost inflation. The agency projects that the debt to EBITDA leverage ratio will remain in the high 3.5x to 4.0x range over the next 12-18 months.

In 2026, free cash flow after dividends is expected to remain around $50 million to $100 million positive, supporting moderate debt reduction. However, Moody’s anticipates free cash flow will decline in 2027 due to potentially increased capital expenditures and reduced working capital benefits.

The company’s large dividend payments limit available funds for debt reduction, though Moody’s notes that reducing dividends could provide a potential source of financial flexibility.

As of January 3, 2026, Flowers Foods has sufficient liquidity to cover its $400 million notes maturing in October 2026, with $492 million available under its revolving credit facility and $130 million available for receivables repurchase.

Moody’s downgraded Flowers’ governance issuer rating from G-1 to G-2, reflecting the execution risk associated with management’s efforts to maintain investment-grade ratings and restore leverage to more conservative levels.

The Baa3 rating reflects Flowers’ position as the second-largest player in the U.S. packaged bread category, with several leading brands in mainstream, organic, and gluten-free segments. However, challenges include a highly concentrated bread product portfolio, limited growth potential in traditional categories, constrained pricing power, and ongoing legal proceedings with independent distributors.

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