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TreeHouse Foods (THS) Q4 Earnings: Volume, Cost Woes to Stay?

Zacks Equity Research

TreeHouse Foods, Inc. THS is slated to come up with fourth-quarter 2018 results on Feb 14. This manufacturer of packaged foods and beverages has a robust earnings surprise history, as its bottom line has outperformed the Zacks Consensus Estimate by average of 27.2% over the trailing four quarters. Let’s see how the company is positioned ahead of the upcoming quarterly results.

TreeHouse Foods, Inc. Price and EPS Surprise



TreeHouse Foods, Inc. Price and EPS Surprise | TreeHouse Foods, Inc. Quote

What to Expect?

The Zacks Consensus Estimate has remained stable in the past 30 days at 96 cents, which reflects a decline of close to 6% from the year-ago quarter’s figure. Further, the consensus mark for revenues is $1,493 million, depicting a drop of 12.2% from the year-ago quarter.

Factors Likely to Weigh on TreeHouse Foods

TreeHouse Foods has been posting lower DOI margin for the past four quarters, owing to higher commodity and freight costs. During the third quarter, division DOI declined $12 million to $155 million, as favorable pricing couldn’t fully offset higher freight, commodity, warehousing and packaging costs. Also, certain operational headwinds in the Snacks and Beverages segments hurt division DOI. Notably, DOI margins declined in most segments during the quarter. Freight and commodity costs also weighed on TreeHouse Foods’ gross and EBITDA margins.

Well, escalated costs have been posing hurdles for many other food companies like Campbell Soup CPB, General Mills GIS and Conagra Brands CAG, among others. Coming back to TreeHouse Foods, these cost headwinds and soft sales led to a year-over-year decline in the company’s bottom line in the third quarter. In fact, the quarter marked its sixth consecutive period of year-over-year decline in earnings and sales.  Revenues were marred by efforts to rationalize low margin SKUs, divestiture of McCann's business, adverse volume/mix stemming from stiff competition and foreign currency headwinds.

Can Strategies Offer Sufficient Respite?

TreeHouse Foods is on track with its TreeHouse 2020 strategic plan, which concentrates on restructuring and realigning the business as a whole. Alongside cost savings, the initiative is expected to manage the company’s portfolio, and optimize production and supply chain. The company expects to invest these savings in market-differentiated capacities to cater to consumers’ ever-changing demands. In this regard, the company made certain achievements in the first phase of the program. In fact, the company earlier stated that it is on track to simplify structure, undertake plant consolidation and complete the rollout of the TreeHouse Management Operating System in 2018.

Additionally, TreeHouse Foods is committed toward its Structure to Win program, which is focused on aligning the company’s SG&A expenses with its division structures. This, in turn, is likely to enrich customers’ experience. Results from this program were reflected in the company’s third-quarter 2018 results, wherein operating expenses, as a percentage of sales, benefitted from the Structure to Win initiative and other cost-saving efforts. Markedly, management stated that 2018 savings from this program can even exceed $55 million, which was the initial exit run-rate target. These initiatives along with the company’s focus on buyouts and organic food offerings should offer some respite in the quarter to be reported. However, it is yet to be seen if these can completely offset the hurdles the company is facing.

Unfortunately, management had earlier stated that it expects soft volume trends to linger into the fourth quarter, with Meals and Snacks divisions being weak in particular. The Zacks Consensus Estimate for sales at Meals and Snacks segments are currently pegged at $255 million and $285 million for the fourth quarter, respectively, compared with $292 million and $394 million in the same period last year. Moreover, freight and commodity cost woes are expected to linger in 2018, though the company is making aggressive pricing efforts to counter the same. These factors raise concerns over the upcoming results.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for TreeHouse Foodsthis earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though TreeHouse Foods carries a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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