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TreeHouse Beats Q2 Earnings on Higher Margins

GMCR UNFI THS

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TreeHouse Foods, Inc. (THS - Snapshot Report) reported second-quarter 2013 adjusted earnings of 65 cents per share, beating the Zacks Consensus Estimate by a penny. The adjusted earnings per share also surpassed the year-ago earnings of 60 cents by 8.3% backed by higher margins. The adjusted earnings excluded expenses related to the restructuring of the company's soup operations, the closure of the Seaforth, Ontario, Canada salad dressing plant and the acquisition of Cains Foods.

Revenues and Margins

Total revenue slipped 0.2% year over year to $526.3 million due to lower volume and unfavorable product mix. Revenues also missed the Zacks Consensus Estimate of $545.0 million.

Gross margins inflated 60 basis points (bps) to 20.8% in the second quarter backed by improved mix of sales and operating efficiencies. Operating income went down marginally by 1.2% to $40.9 million mainly due to higher selling, distribution, general and administrative expenses, which was up 7% from the year-ago level.

North American Retail Grocery segment

Net revenue for the segment climbed 1.1% year over year to $375.7 million, driven by 0.7% increase in favorable volume/mix and 0.4% gains from the acquisition of Naturally Fresh. Strong performance in the single service beverage business, Mexican sauces and dressings boosted sales of the segment. Direct operating income margin in the reported quarter inflated 150 bps to 16.3% backed by lower cost of sales, operating efficiencies and reduced freight rates.

Food Away From Home segment

Net revenue for the segment slipped 2.5% year over year to $85.7 million, due to an 8.3% negative impact from unfavorable volume/mix. Also, direct operating income margin inflated 210 bps and came in at 14% driven by favorable sales/mix and efficiency gain.

Industrial and Export segment

Net revenue for the segment went down 4.6% year over year to $64.9 million due to unfavorable volume/mix. However, direct operating income margin inflated 860 bps to 20.8% backed by the company’s shift of focus to high margin products.

2013 Outlook

The company raised its adjusted earnings per share guidance for 2013 and now expects adjusted earnings in the range of $3.07 to $3.12 per share, up from the previous guidance of $3.00 to $3.10. The guidance reflects the company’s initiatives to increase its operational efficiencies and cost reduction programs.

Takeover of Associated Brands

In early-Aug 2013, TreeHouse entered into an agreement to buy the leading private-label manufacturer of powdered drinks, specialty teas and sweeteners, Associated Brands GP Corporation. The buyout is expected to bolster TreeHouse’s retail presence in the private-label dry grocery world. Though the acquisition will not affect 2013 earnings, it will be accretive to 2014 results. The takeover will add approximately $200 million of sales and around 14 cents to 16 cents of earnings per share.

Our Take

TreeHouse presently carries a Zacks Rank #2 (Buy). Other consumer staples stocks worth considering are Nash Finch Company , Green Mountain Coffee Roasters Inc.(GMCR - Analyst Report)and United Natural Foods Inc.(UNFI - Analyst Report). While Nash Finch and Green Mountain carry a Zacks Rank #1 (Strong Buy), Fairway Group carries a Zacks Rank #2 (Buy).

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