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TreeHouse Foods (THS) Looks Troubled by Escalated Cost Woes

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Matters appear sour for TreeHouse Foods, Inc. (THS - Free Report) at the moment. The company is encountering inflated cost challenges, which are likely to persist in 2021. Also, tough comparisons with the year-ago period’s demand spike weighed on the company’s first-quarter 2021 year-over-year net sales comparison. We note that the company’s second-quarter earnings view suggests a decline from the year-ago quarter’s reported figure.

Incidentally, the Zacks Consensus Estimate for the second quarter and 2021 have tumbled considerably from 56 cents to 26 cents per share and from $2.97 to $2.82 per share, respectively. Further, the Zacks Rank #4 (Sell) stock has declined 13.4% in the past three months against the industry’s growth of 0.3%. Let’s take a closer look.

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Escalated Cost Concerns

In first-quarter 2021, gross margin came in at 17.1%, contracting 0.9 percentage points from the year-ago quarter’s figure. The decline was caused by lower volumes due to soft pandemic-related demand, additional costs associated with the pandemic (which included higher production shifts, increased sanitization measures, supplemental payments and protective equipment) and inflated commodity costs. Total operating expenses, as a percentage of sales, rose 0.8 percentage points to 16% as a result of elevated freight costs, professional service fees and integration costs related to the pasta business buyout. Adjusted EBITDA from continuing operations declined 0.4% to $106.2 million due to higher freight costs and soft retail demand.

Management on its first-quarter earnings call said that it expects inflation to increase across several agricultural commodities, especially edible oils. Also, it expects escalated transportation costs. For 2021, the company projects agricultural commodity inflation of $100-$110 million, along with elevated labor and freight costs. Incidentally, burgeoning demand and limited driver availability have led to escalated freight costs across the industry.

Drab Q1 Results & Q2 View

In first-quarter 2021, both top and bottom lines declined year over year and the former missed the Zacks Consensus Estimate. Results were affected by lower retail demand due to tough comparisons with the year-ago period’s stock-hoarding trends, along with cost inflation. Adjusted earnings from continuing operations amounted to 36 cents per share that declined 2.7% year over year. Net sales of $1,057.3 million missed the consensus mark of $1,087 million and fell 2.5% year over year. Organic sales fell 5% due to lower volume/mix and adverse pricing impacts. Volume/mix fell 4.7% due to soft retail demand, which resulted from tough comparisons with the year-ago period’s pandemic-led demand, stemming from consumers’ pantry-loading trends. Unfavorable impacts stemming from the divesture of the two In-Store Bakery facilities also weighed on volume/mix.

Though TreeHouse Foods has begun undertaking increased pricing actions to battle the inflationary pressure, these efforts are expected to reap benefits in the second half of 2021. In fact, the company expects a temporary drag on earnings and margins in the second quarter, as a result of the timing lag as to when pricing efforts are realized. For the second quarter of 2021, management expects net sales of $1.02-$1.07 billion and adjusted earnings per share from continuing operations of 20-30 cents. In second-quarter 2020, sales and earnings came in at $1,041.9 million (nearly $1.04 billion) and 58 cents per share, respectively.

Wrapping Up

TreeHouse Foods has restored service levels, taking it almost back to the pre-COVID-19 level. Apart from this, the company said that the away-from-home sector is witnessing a recovery, thanks to the easing of limits across regions as well as increased vaccination in the United States. This, in turn, gives out favorable indications for the company’s foodservice business. That being said, the abovementioned hurdles cannot be ignored.

3 Stocks Worth Relishing

Darling Ingredients (DAR - Free Report) , which currently carries a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 29.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

J&J Snack Foods (JJSF - Free Report) has a Zacks Rank #1 and its bottom line outpaced the Zacks Consensus Estimate by a significant margin in the trailing four quarters, on average.

Nomad Foods (NOMD - Free Report) has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 10.3% in the trailing four quarters, on average.

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