Weak Prelim Results for TreeHouse

TreeHouse Foods Inc. (THS - Snapshot Report) recently reduced its fiscal 2011 earnings outlook to $2.70–$2.73 per share from the earlier projection of $2.90–$3.00 per share based on a 4% reduction in fourth-quarter retail channel volume. December volumes declined a record low of 8%, which was the worst in the company’s history. Lower consumer food purchases, sales shift away from traditional grocery customers toward alternate channel retailers and adverse impact of warm weather in the Midwest and Northeast on seasonal sales were the primary deterrents. The recent guidance includes the fourth quarter earnings projection of 84–87 cents per share.

This is the second time TreeHouse cut its outlook for fiscal 2011. In June last year, the company trimmed its outlook to the range of $2.90–$3.00 from $3.00–$3.08 per share after taking into account higher freight, transportation, packaging and other related commodity costs.

While sales in December are generally driven by cold weather products like soup, non-dairy creamers and hot cereal, however, relatively warmer weather during this December marred the business. Soup fell 8.8%, non-dairy creamers declined 4.7% and hot cereal was down 4.6% year over year. Additionally, customers were more inclined to purchase from alternate channel retailers such as club stores, limited assortment stores and dollar stores. As a result, sales to traditional retailers declined in the high single digits, while sales to alternate retail channels were up double digits.

TreeHouse had expected to counter the increased expenses through pricing. The pricing initiated in the second quarter contributed approximately 4% to fourth quarter sales, while acquisitions added approximately 2%. However, volume/mix subtracted 1%.

Illinois-based TreeHouse, which operates as a food manufacturing company serving primarily the retail grocery and foodservice channels, reported fourth quarter revenue growth of 5.0% to $535.0 million. However, fourth quarter gross margin is expected to be approximately 22%, down from 24.8% in the year-ago fourth quarter. Despite lower operating expenses, mix shift toward lower margin products hurt the quarterly margin.  

After registering steady growth in the last six years, purchases of shelf stable dry groceries recorded sharpest decline, which forced TreeHouse to trim its guidance. However, despite this disappointing outlook, TreeHouse expects to overcome these temporary difficulties as early as possible. The company kicked off January on a positive note with retail grocery private label shipments and orders up by approaching double digits year over year. The company is also equipped with strong balance sheet and cash flow to purse further acquisitions in private label foods.

TreeHouse currently retains a Zacks #3 Rank (short-term Hold rating). The company will announce its fourth quarter results on February 10. Major competitors of TreeHouse include Corn Products International Inc. (CPO - Snapshot Report) and Omega Protein Corp. (OME - Snapshot Report).

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