It has been about a month since the last earnings report for TreeHouse Foods (THS). Shares have lost about 10.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is TreeHouse due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
TreeHouse Q2 Earnings Beat Estimates, Sales Decline
TreeHouse Foods released second-quarter 2019 results, with the bottom line beating the Zacks Consensus Estimate. However, earnings and sales declined year over year. Headwinds like SKU rationalization, McCann's divestiture as well as the adverse impacts from volume/mix and currency fluctuations impacted the outcome. However, pricing actions and savings initiatives — TreeHouse 2020 and Structure to Win — provided some respite.
Quarter in Detail
Adjusted earnings of 36 cents per share beat the Zacks Consensus Estimate of 29 cents and also surpassed management’s previous guidance by a penny. However, the bottom line reflects 2-cents decline from the year-ago quarter’s figure.
Net sales of $1,250.7 million missed the consensus mark of $1,298 million and tumbled almost 14.1% year over year. The downside was caused by SKU rationalization of low-margin businesses and the divestiture of McCann. Excluding SKU rationalization and divestiture impacts, sales fell 12.9% primarily due to adverse volume/mix, unfavorable pricing and foreign currency headwinds.
Gross margin came in at 15.9%, down 30 basis points (bps) from the year-ago quarter’s figure. This was triggered by lower volumes and a charge related to multiyear pension withdrawal.
Operating expenses increased 50% year over year. As a percentage of sales, the same increased 11.8 percentage points to 27.8%.
Further, adjusted EBITDA declined 5.3% to $113.4 million, owing to fixed cost impacts stemming from low volumes and unfavorable pricing. These were partially offset by lower freight costs and savings from the Structure to Win initiatives and TreeHouse 2020.
Baked Goods: Sales in the segment fell 6.9% year over year to $397.1 million. The downside was caused by SKU rationalization, adverse volume/mix and currency. This was partially mitigated by favorable impacts from pricing. Direct operating income (DOI) margin in the segment advanced 180 bps to 10.5%, driven by favorable pricing, lower product costs, reduced freight, favorable mix and reduced expenses driven by Structure to Win and TreeHouse 2020 efforts. These were partially negated by lower volumes and higher commodity expenses related to the packaging of flour.
Beverages: Sales fell 10% to $212.8 million due to efforts to rationalize SKUs, adverse volume/mix and unfavorable pricing. DOI margin declined 30 bps to 19.4% owing to unfavorable pricing, increased production costs and adverse volume/mix impacts. These were partially countered by lower freight.
Meals Solutions: Net sales declined almost 9.3% to $470.3 million owing to SKU rationalization efforts, impacts from the divestiture of McCann’s business, adverse volume/mix and currency rates. However, the decline was partly compensated by improved pricing. DOI margin improved 50 bps to 11.8% owing to favorable pricing, lower freight costs and reduced expenses driven by TreeHouse 2020 and Structure to Win initiatives. These were countered by higher costs of certain commodities and lower volumes.
Snacks: Net sales in the segment plunged 37.8% to $170.5 million due to lost distribution for the Snack nuts and Trail mix as well as unfavorable pricing. DOI margin declined 460 bps, owing to reduced volumes and the associated fixed cost impacts. This was somewhat countered by lower freight costs and input prices of certain commodities.
Other Financial Updates
The company concluded the reported quarter with cash and cash equivalents of $63.7 million, long-term debt of $2,257.6 million and total shareholders’ equity of $1,983.3 million. For the first half of 2019, cash provided by operating activities amounting to $9.4 million.
Other Developments & Guidance
In a separate release, management announced that it has completed the divestiture of snack nuts and trail mix business to Atlas Holdings for $90 million. The sale of ready-to-eat cereal business to Post Holdings is also on track. As a result, these businesses will form part of the company’s discontinued operations from the beginning of the third quarter. These divestitures are expected to be accretive by nearly 19 cents upon the bottom line in 2019. However, earnings for the year will be weighed down by adverse impacts of nearly 6 cents, stemming from certain adjustments.
After considering these, management expects adjusted earnings from continuing operations for 2019 in the band of $2.33-$2.63.
Further, management expects third-quarter 2019 adjusted earnings in the range of 52-62 cents and net sales in the band of $1.04-$1.14 billion. Decline in sales in the Baked Goods and Meals Solutions units is likely to dent quarterly performance. However, the Beverages division is expected to perform well.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -16.2% due to these changes.
Currently, TreeHouse has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, TreeHouse has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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