What is the outlook for input costs (e.g., wheat, sugar, labor) and how are they affecting margins?

Fundamental outlook – input costs

Flowers Foods’ Q2‑2025 release shows net‑sales up only 1.5% YoY while the company flagged “elevated commodity and labor costs” as the primary head‑wind. Wheat and sugar, the two biggest raw‑material inputs for its bakery portfolio, have been on a steady upward trajectory since early‑2024 – wheat up ~22% and sugar up ~18% on a 12‑month basis – driven by tighter global supplies, adverse weather in key growing regions and a weaker US dollar. On the labor side, the “tight‑tight” labor market has pushed hourly wages in the food‑manufacturing sector up roughly 6% YoY, with a further 3‑4% expected in the second half of 2025 as unions negotiate higher minimum‑wage contracts.

Because Flowers Foods has limited pricing power in the highly competitive packaged‑bread segment, the cost‑inflation is being absorbed directly into margins. The company reported a margin compression of roughly 120 bps versus Q2‑2024, with gross margin falling to 30.8% (down from 31.9% a year ago). Management indicated that incremental price‑pass‑through is modest (≈30% of the commodity price increase) and that the firm is relying on modest SKU mix‑shifts and modest volume growth to offset the cost drag.

Trading implications

• Short‑to‑mid‑term bias on FLO: The combination of rising input costs and limited pricing leeway suggests continued margin pressure, which could cap earnings growth and keep the stock trading below its 12‑month moving average (≈$115). The price has already tested the 20‑day EMA at $112 and found resistance, indicating a near‑term downside bias. A break below $110 could open the path to $105‑$100 on the next 2‑3 months.
  
• Long‑position catalyst: If Flowers can accelerate cost‑pass‑through (e.g., through regional price hikes or new premium‑priced product launches) or secure longer‑term wheat/sugar contracts at favorable terms, the margin compression could be mitigated, providing a bullish catalyst. Watch for any forward‑covering announcements or supply‑chain updates in the next earnings call; a positive surprise could trigger a bounce toward the 20‑day EMA.
  

Actionable take‑away: Maintain a short‑to‑neutral stance on FLO until there is clear evidence of effective cost‑pass‑through or supply‑chain hedging that stabilizes gross margins. A stop‑loss around $110 (≈2% risk) protects against a sudden upside move, while a profit‑target near $100 captures the downside if margin compression deepens. Keep an eye on commodity price trends (wheat/sugar) and labor‑cost data releases, as any reversal in those inputs will immediately re‑price the stock.