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TreeHouse Foods (THS) Q3 Earnings & Sales Miss Estimates

CAG MKC THS KHC

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TreeHouse Foods, Inc. (THS - Free Report) reported weaker-than-expected third-quarter 2016 results. Further, management slashed its earnings view for 2016 due to the lower margin structure of the acquired Private Brands business from ConAgra Foods, Inc. (CAG - Free Report) (closed in Feb 2016). Shares of the food company fell 19.48% yesterday after the guidance cut.

This Illinois-based food company posted earnings per share of 70 cents in the third quarter of 2016. Earnings lagged the Zacks Consensus Estimate of 77 cents by 9.1% and were way short of the company’s guided range of 75−80 cents.

However, earnings declined 18.6% from the year-ago level due to lower gross margin related to the acquisition of the Private Brands business, which has a lower margin structure than the legacy TreeHouse business.

 

Net sales of $1.59 billion also lagged the Zacks Consensus Estimate of $1.64 billion by 3%. However, sales surged 98.7% year over year due to the inclusion of business from the Private Brands acquisition and favorable volume/mix, primarily in the North American Retail Grocery segment, partially offset by lower pricing.

All the segments posted strong growth on a year-over-year basis. North American Retail Grocery segment sales soared 118.5%. Sales from the Food Away From Home segment grew 66.4%; while that from the Industrial and Export segment was up 16.2%.

Gross margin was 18.0% in the third quarter, down 190 basis points from 19.9% last year. The decline was due to lower margin business from the Private Brands acquisition, partially offset by favorable sales mix and lower input costs. 

Adjusted EBITDA increased 69.8% to $169.5 million, driven by the inclusion of operating income from the Private Brands acquisition and favorable commodity costs, partially offset by higher costs.

TREEHOUSE FOODS Price, Consensus and EPS Surprise

 

TREEHOUSE FOODS Price, Consensus and EPS Surprise | TREEHOUSE FOODS Quote

Dismal Outlook

The company expects the lower sales trends to continue in 2016. However, it anticipates margin improvement to persist in 2017 and 2018 as revenues from most of the Private Brands categories will begin to stabilize. TreeHouse remains on track to fully integrate its acquisition of the Private Brands business.

The company lowered its earnings expectations for 2016 due to lower-than-expected third-quarter sales from the Private Brands business, along with expectation of sluggish fourth-quarter Private Brands sales.

TreeHouse now expects adjusted earnings to be in a range of $2.80−$2.85 per share, down from $3.00−$3.10 expected previously.

We note that the company has been struggling with lower margins related to its acquisition of Private Brands, a decision that resulted in plant closures, a lowered annual profit outlook and a reshuffling of TreeHouse’s executive ranks.

The company stated it would close a plant in Delta, British Columbia and reduce its manufacturing footprint in Battle Creek, MI, which would impact approximately hundreds of jobs. Both the Battle Creek and Delta facilities were part of the company's acquisition of ConAgra's private brands business.

In addition, the company appointed Matthew Foulston as its chief financial officer. Foulston will join TreeHouse on Dec 2 and replace Dennis Riordan, who announced his retirement in August. Riordan would, however, remain with the company as a president, till it finds a new one after the resignation of Christopher D. Sliva.

Q4 Outlook

The company expects fourth-quarter adjusted earnings to be in the range of $1.07−$1.12 per share.

Zacks Rank

TreeHouse has a Zacks Rank #4 (Sell).

Some well-positioned food stocks in the industry include The Kraft Heinz Company (KHC - Free Report) and McCormick & Company, Inc. (MKC - Free Report) . Both the stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

While Kraft Heinz has a long-term earnings growth rate of 19.54%, McCormick has a long-term earnings growth rate of 9.00%.

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