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Pinnacle Foods (PF) Q3 Earnings Beat, Up Y/Y, Stock Down

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Pinnacle Foods Inc. posted third-quarter 2017 results, wherein both the top and bottom line outpaced the Zacks Consensus Estimate and the latter also grew year over year. While the top line marked a recovery from two consecutive misses, bottom line marked its third straight beat. Notably, Pinnacle Foods has been witnessing year-over-year growth in earnings since 2014.

Further, management reaffirmed its full-year adjusted earnings guidance at the low end of its previously stated range. It looks like the conservative stance and a decline in top line weighed upon investors’ sentiment, as Pinnacle Foods’ shares dipped 3.1% on Oct 26. Nonetheless, backed by an impressive earnings history, this Zacks Rank #2 (Buy) stock has rallied 8.9% over a year, as against the industry’s downside of 7.1%.





Q3 Highlights

Adjusted earnings of 58 cents per share rose 9.4% from the year-ago period, and came a penny ahead of the Zacks Consensus Estimate.  However, GAAP earnings for the quarter came in at 39 cents, compared with 44 cents in the prior-year period.

Net sales fell 1.2% to roughly $750 million, while it came slightly ahead of the Zacks Consensus Estimate of $749 million. While underlying sales grew 3.1%, it was more than offset by an adverse 3.6% impact from the exit of certain low-margin Aunt Jemima (AJ) frozen breakfast products that were sold to retail and foodservice consumers. Top line was also hampered by lingering impacts from the 2016 shutdown of Boulder UK operations and SKU rationalization plan. Hurricanes Harvey and Irma also dented net sales by 0.7%.

Management further stated that the company’s in-market performance remained quite strong in the third quarter, as its retail consumption jumped 3.5% from the year-ago period and market share elevated by 0.7 share points. This also marked Pinnacle Foods’ 14th straight quarter of market share growth, when compared with the same year-ago period.

Adjusted gross profit decreased 5.4% to $216.7 million with the gross margin contraction of 130 basis points (bps) to 28.9%. This was attributable to adverse impacts from the hurricanes along with various discrete costs associated with AJ’s exit and production investments undertaken in second-quarter 2017.

Consequently, adjusted earnings before interest and taxes (EBIT) slipped 3.1% to $130.4 million in the quarter.

Segment Details

Frozen: Segment sales declined 4.1% to $301.4 million on account of the hurricanes and AJ’s exit. Underlying sales remained flat year over year, as favorable impacts from net realized pricing and currency translations were offset by lower volume/mix. Adjusted EBIT for the segment dropped 11.1% to $52.5 million, owing to the aforementioned discrete costs, along with higher input costs and marketing expenses which could not be compensated by increased productivity.

Grocery: Segment sales rose 4.4% to $270.4 million backed by solid volume/mix growth and favorable net price realization, partly countered by the detrimental impacts from hurricanes. Adjusted EBIT for the segment grew 4.7% to $58 million backed by enhanced net sales; productivity savings and synergies from the Boulder Brands acquisition. These were offset by the factors that hurt operating income at the Frozen segment.

Boulder: Pinnacle Foods completed the acquisition of Boulder Brands on Jan 15, 2016. Consequently, it became a wholly-owned subsidiary of the company. In third-quarter 2017, sales at the Boulder segment jumped 9.3% to $101 million, fueled by robust underlying volume/mix growth, along with favorable net price realization. This was somewhat mitigated by the SKU rationalization program and shutdown of the Boulder UK operations. Adjusted EBIT for the Boulder Brands segment totaled $18.6 million, representing a surge of 49% from the prior-year quarter.

Specialty Foods: Segment sales tumbled 17.2% to $77 million due to reduced volume/mix, impacts from the AJ exit and lower net price realization. Well, the volume/mix was majorly hurt by the company’s previously announced exit from its gardein private label business. Also, the segment’s adjusted EBIT plunged 21.3% to $7.3 million in the reported quarter.

Other Financial Aspects

Pinnacle Foods ended the quarter with cash and cash equivalents of $131.3 million, long-term debt of $2,936.4 million, and total equity of $1,967.5 million.

In the first three quarters of 2017, the company generated cash flow from operations of $178.7 million and incurred capital expenditure of $70.5 million.

2017 Guidance

Management remains impressed with its in-market performance in the third quarter, as all the retail segments delivered consumption and market share growth. Moreover, management noted that its bottom line has grown nearly 20% through the third quarter. Going forward, the company expects results to be stronger, and anticipates gross margin for 2017 to be in line with 2016. Also, Pinnacle Foods is on track with its network optimization plan, and remains committed toward achieving its long-term margin goal for 2019 and onward.  

All said, Pinnacle Foods reaffirmed its adjusted earnings per share guidance for 2017 in the band of $2.55-$2.60, and still expects the bottom line to come at the lower end of this range. This outlook, which includes the effects of the aforementioned discrete items and the back-to-back hurricanes, reflects a year-over-year increase of nearly 19%. The Zacks Consensus Estimate is currently pegged at $2.55 for 2017, which marks the lower-end of the company’s forecasted range.

Net sales and adjusted earnings for 2017 are anticipated to gain roughly 1% and 3 cents, respectively, from the 53rd week, which is likely to benefit the fourth quarter.

However, the company now expects input cost inflation to be 3% on account of greater-than-anticipated transport costs. Productivity is now estimated to be slightly more than 4% of the cost of products sold. Notably, this does not include the synergies (of at least $15 million) from Boulder Brands acquisition, which are likely to have a favorable impact on the gross margin as well as SG&A costs.

Capital expenditures for the full year are now expected to be $100 million, compared with the old projection of $115-$125 million.

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