Will Cost Woes Dent TreeHouse Foods' (THS) Q2 Earnings?

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TreeHouse Foods, Inc. THS is slated to release second-quarter 2018 results on Aug 2. This manufacturer of packaged foods and beverages has been battling cost pressures stemming from higher commodity and freight as well as unfavorable volume/mix across most segments. Nevertheless, the company has put into place savings plans to drive margins and invest in business expansion.

Notably, earnings of this manufacturer of packaged foods and beverages surpassed the Zacks Consensus Estimate in three out of the trailing four quarters, the average being 10.1%. That said, let's see what's in store for TreeHouse Foods this time around.

Saving Efforts on Track

TreeHouse Foods is well on track with 2020 strategic plan that was announced in second-quarter 2017. Along with cost savings, the initiative is expected to manage the company's portfolio as well as optimize production and supply chain.  The plan aims to improve the company's operating margin by 300 basis points (bps) by the end of 2020, by undertaking complete business integration and expense reduction. 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. Also, the company is on track to close certain facilities, shut at least 15 production lines and complete the rollout of the TreeHouse Management Operating System in 2018.  

Apart from efforts to boost savings, the company's focus on organic and healthy food offerings continues yield. Notably, premium, better for you, natural and organic offerings now form more than 21% of the company's sales. The company expects sustained growth in these areas and continues to focus on consumer's needs by developing new formulations, packaging, and sizes.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

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

Will Efforts Offset Hurdles?

In spite of strategic efforts to boost performance, the company's top- and bottom-line performance has been unimpressive. In fact, the company's first-quarter 2018 results marked its fourth consecutive quarter of year-over-year decline in earnings and sales. Revenues in the quarter were mainly marred by the divestiture of SIF (Canned Soup and Infant Feeding) business and SKU rationalization. Further, intense industry competition kept volume/mix under pressure in most segments, whereas pricing also remained challenged in the Beverages segment.

Additionally, TreeHouse foods has been posting lower DOI margin for the past three quarters, owing to higher commodity and freight costs. Apart from TreeHouse Foods, other food companies like United Natural Foods UNFI , McCormick & Company MKC and Conagra Brands CAG have also been grappling with higher freight and transportation costs.

It looks like the aforementioned savings efforts will take time to offset the ongoing hurdles completely. Unfortunately, management expects increased freight and commodity costs along with unfavorable volume/mix stemming from SKU rationalization, to remain headwinds in 2018.

Estimates Reveal a Dull Picture

These hiccups had a negative impact on management's second-quarter guidance. The company expects earnings for the second quarter to range between 20-30 cents per share, which reflects a year-over-year decline from 51 cents reported in the year-ago period. Management also anticipates second-quarter sales to lie between $1.3-$1.4 billion, marking a considerable decline from $1.5 billion reported in the year-ago quarter.

To top these, the Zacks Consensus Estimates for the second quarter reflect a gloomy picture. Consensus Estimate for the second quarter earnings, which is currently pegged at 25 cents, indicates a year over year slump of almost 51%.  Estimates have been stable in the past 30 days. Also, the Zacks Consensus Estimate for revenues is pegged at $1,396 million, reflecting a decline of 8.2% from the year-ago quarter.

What the Zacks Model Unveils

Our proven model does not conclusively show that TreeHouse Foods is likely to beat bottom-line estimates this quarter. 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 .

Although TreeHouse Foods Zacks Rank #3 increases the predictive power of ESP, its Earnings ESP of -6.00% makes us less confident about an earnings surprise. You can see  the complete list of today's Zacks #1 Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: UNFI , CAG , MKC , THS

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