Treehouse Foods, Inc. (THS Quick QuoteTHS - Free Report) reported lower-than-expected first-quarter 2017 results, after delivering stellar fourth-quarter 2016 results. Also, the company issued a soft guidance for the second quarter, which is below expectations. Following the weak results and subdued second-quarter outlook, shares of the company declined 10.4% yesterday.

This Illinois-based food company posted adjusted earnings of 61 cents per share in the first-quarter that surged 27.1% from the prior-year quarter. Further, the earnings came within the lower end of the company’s guided range of 60–70 cents. But the bottom line lagged the Zacks Consensus Estimate of 65 cents by 6.2%. This upside was driven by the higher sales led by the Private Brands’ operations and higher margins.

On a GAAP basis, the company reported earnings of 49 cents versus a loss of 6 cents recorded in the year-ago quarter.

We note that this Zacks Rank #3 (Hold) stock has gained 8% year to date, against the Zacks categorized Food – Miscellaneous/Diversified industry’s loss of 2.1%. Treehouse Foods forms part of the Consumer Staples sector that is currently placed at bottom 38% of the Zacks Classified sectors (10 out of 16).

Q1 Highlights

Net sales of $1,536.2 million rose 20.9% but fell short of the Zacks Consensus Estimate of $1,539 million by 0.2%. This upside came on the back of additional sales from the private brands business acquired from Conagra Brands, Inc. (CAG Quick QuoteCAG - Free Report) , coupled with positive volume/mix, mainly in the Beverages segment that was partly compensated with lower pricing. Notably, all the segments posted strong growth on a year-over-year basis.

Gross margin was 18.6% in the first quarter, up 90 basis points (bps) from year-ago figure of 17.7%. The increase was owing to higher margins from the Private Brands’ acquisition and lower commodity expenses.

Adjusted EBITDA surged 23% to $154.1 million, driven by the extra month of Private Brands’ operations, favorable commodity charges and trade. These were partly compensated with the unfavorable pricing mainly from competitive pressure.

Segment Details

In the first quarter, TreeHouse Foods made changes in the organizational structure that reflected management of its business as well as allocation of the resources. Currently, the company’s reportable segments are organized by products and are classified into Baked Goods, Beverages, Condiments, Meals, and Snacks. Earlier, the reportable segments were categorized by customer channels like North American Retail Grocery, Food Away From Home, and Industrial and Export.

Baked Goods: Sales at the segment surged 55.4% to $341.1 million, driven by the additional month of Private Brands’ operations. Direct operating income also increased 45.5% to $41.9 million in the quarter. However, operating margin declined 80 bps to 12.3% due to increased supply chain and operating expenses, unfavorable pricing, marginal rise in freight rates as well as the build-out of the segment structure. These were somewhat offset by reduced commodity expenses.

Beverages: Sales at the segment grew 19.2% to $268 million, chiefly due to the positive volume/mix related to additional distribution in the current quarter in the single serve beverage, broth as well as non-dairy creamer groups. This was partly compensated with the unfavorable pricing owing to competitive pressure. Direct operating income also inched up 1.7% to $58.7 million in the quarter.

However, operating margin shriveled 380 bps to 21.9% due to unfavorable pricing, rise in commodity expenses for oils and green coffee, negative sales mix and temporary higher freight cost. These were partly mitigated by positive operating expenses through cost-savings programs.

Condiments: Sales at the segment rose 4.9% to $310.1 million, driven by the additional month of Private Brands’ operations, somewhat offset by unfavorable volume/mix, mainly in the sauces and salsa groups along with unfavorable pricing from competitive pressure. However, direct operating income fell 9.7% to $31.7 million in the quarter. Also, operating margin contracted 170 bps to 10.2% due to higher commodity and operating expenses, somewhat offset by gains from foreign currency as well as cost saving initiatives.

Meals: Sales at the segment jumped 18.9% to $324 million, driven by the additional month of Private Brands’ operations, partly compensated with unfavorable pricing and volume/mix. Direct operating income also grew 28.8% to $34 million in the quarter. In addition, operating margin expanded 80 bps to 10.5% owing to the extra month of higher margin from the Private Brands’ business as well as lower commodity charges. These were somewhat offset by a rise in operating and temporary freight expenses.

Snacks: Sales at the segment climbed 12.7% to $290.6 million, driven by the additional month of Private Brands’ operations coupled with positive pricing, partly offset by the unfavorable volume/mix. Direct operating income also increased 27.6% to $12.5 million in the quarter. Also, operating margin rose 50 bps to 4.3% on the back of favorable sales mix as well as reduced operating costs, somewhat offset by the build-out of the segment structure.

Other Developments

TreeHouse Foods closed its two facilities that were announced earlier. Further, management declared the divestment of its Soup and Infant Feeding business to Insight Equity.

2017 Outlook

Management remains impressed with the progress of the Private Brands’ integration and revised organizational structure. Also, the company seems to be on track with the progress of information technology.

Moving ahead, TreeHouse Foods remains focused to better cater to its customers backed by its business portfolio, despite a tough retail environment and changing customer buying patterns. Further, it also plans to boost sales, optimize its operations and drive higher margins.

TreeHouse Foods reiterated its adjusted earnings guidance for 2017. The company now continues to expect earnings in the band of $3.50–$3.70 per share. Additionally, it projects the Zacks Consensus Estimate for 2017 to be $3.62, which is in line with the company’s guided range. Further, its GAAP earnings are anticipated in the range of $3.38–$3.58 per share.

Notably, the second quarter will be the lowest quarter in 2017 with respect to earnings. Moreover, management expects a soft retail landscape to persist in the same period. Consequently, TreeHouse Foods anticipates both the GAAP and adjusted earnings in the band of 45–55 cents. Also, the Zacks Consensus Estimate is currently pegged higher at 72 cents. In should be noted that the company had posted adjusted earnings of 54 cents in the second quarter of 2016.

Stocks that Warrant a Look

Better-ranked stocks in the same industry include Aramark Holdings Corp. (ARMK Quick QuoteARMK - Free Report) and Lamb Weston Holdings, Inc. (LW Quick QuoteLW - Free Report) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
Aramark, with a long-term earnings growth rate of 12.8% has increased 8.9% in the past three months.

Lamb Weston, with a long-term earnings growth rate of 4.2% surged 36% in the past six months.

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