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Why Is Treehouse (THS) Down 9.6% Since the Last Earnings Report?

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About a month has gone by since the last earnings report for Treehouse Foods, Inc. (THS - Free Report) . Shares have lost about 9.6% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

TreeHouse Foods Tops Q2 Earnings, Cuts View on Soft Volumes

TreeHouse Foods posted second-quarter 2017 results wherein adjusted earnings of 51 cents came ahead of the Zacks Consensus Estimate of 49 cents. Although earnings were within management’s guided range of 45-55 cents, the same had declined 15% from the prior-year earnings. Results for the quarter were hurt by unfavorable market conditions, pricing lag from commodity cost increases and operating inefficiencies related to lower than anticipated volumes. Following the results, the company lowered its full year earnings guidance.

Quarter in Detail

Net sales of $1.52 billion came below the Zacks Consensus Estimate of $1.54 billion, witnessing a decline of 1.2% from last year. Sales during the quarter were mainly affected by the divestiture of the SIF (Canned Soup and Infant Feeding) business, resulting in 1.1% of the overall decline. Further, sales decreased due to unfavorable volume/mix, foreign currency fluctuations and pricing. These were partially offset by the gain arising from sunflower seed recalls in 2016. We note that sales came below the Zacks Consensus Estimate in three out of the trailing four quarters.

Gross margin was 18.2% in the second quarter, up 100 basis points (bps) from year-ago figure of 17.2%, primarily due to lower cost of sales, as product recalls added $5.3 million to the cost of sales last year.

Adjusted EBITDA decreased 4.1% to $148.5 million, mainly due to unfavorable pricing resulting from competitive pressures, higher commodity and operating costs as well as adverse volume/mix. These were partially offset by cost savings and reduction in variable incentive compensation.

Segment Details

The company’s reportable segments are organized by products and are classified into

Baked Foods: Sales inched up 0.4% to $324.3 million as a result of favorable volume/mix. This was partially offset by unfavorable pricing and competitive pressure. Direct operating income margin during the quarter had declined 80 bps to 10.0% primarily due to higher operating costs and the non-repeat of a rebate received in the second quarter of 2016, partially offset by lower commodity costs, decline in freight and commission rates, and cost savings.

Beverages: Sales increased 15.6% to $246.2 million as a result of favorable volume/mix. This was partially offset by unfavorable pricing and lower sales due to sale of a part of Tetra re-cart broth business, in relation to the divestiture of the SIF business. Direct operating income margin during the quarter had declined 90 bps to 24.5% primarily due to unfavorable pricing and commodities. These were offset by gains from cost savings and favorable volume/mix.

Condiments: Sales for the segment increased 1.3% to $344.9 million as a result of favorable volume/mix, pricing and lower trade spent. It was partially offset by unfavorable foreign exchange. For the quarter, direct operating income margin had declined 190 bps to 10.4% primarily due to higher commodity cost, packaging and operating costs. These were partially offset by cost savings in SG&A.

Meals: Net sales declined 9% to $288.4 million owing to the divestiture of the SIF business, adverse volume/mix primarily in the ready-to-eat cereal category and unfavorable pricing. Direct operating income margin had increased 240 bps to 11.7%. The surge was mainly due to favorable commodity costs, lower depreciation and SG&A cost savings.

Snacks: Net sales from the segment had declined 11.5% to $317 million, owing to adverse volume/mix, exit of low margin co-pack business and low merchandising support from customers. These were partially offset by favorable pricing. Direct operating income margin went down 210 bps to 3.2% due to unfavorable volume/mix, increased commodity costs and slightly unfavorable freight and commission rates.

TreeHouse 2020 Initiative

Along with the second quarter 2017 results, the company announced that it would launch the first phase of the comprehensive strategic multiyear plan, TreeHouse 2020. The plan has been designed to restructure and realign the business as a whole. Alongside with cost savings, the initiative is expected to improve management of the company’s category and customer portfolio along with optimizing supply chain. The initiative is believed to improve the company’s operating margin by 300 bps by the end of 2020.

2017 Outlook

TreeHouse continues to work diligently to improve operational effectiveness and reduce cost structure. However, including the impact of the canned soup and infant feeding sale and considering a difficult retail landscape, which has been negatively impacting the company’s volumes across all divisions, the company lowered its full-year guidance. Adjusted earnings for the full year are now expected in the band of $3.15-$3.30 per share compared to previously anticipated $3.50-$3.70. Adjusted earnings for the third quarter are expected in the range of 75-83 cents.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 13.9% due to these changes.

Treehouse Foods, Inc. Price and Consensus

VGM Scores

At this time, Treehouse's stock has a great Growth Score of A, though it is lagging a lot on the momentum front with a D. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We expect below average returns from the stock in the next few months.




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