Why Treehouse Foods' Q4 Earnings Looks Like It Will Disappoint

Treehouse Foods, Inc. THS is slated to release fourth-quarter 2017 results on Feb 15. The question lingering in investors' minds is whether this packaged foods and beverages manufacturer will be able to deliver a positive earnings surprise in the quarter to be reported. Treehouse Foods has a mixed record of earnings surprises, and has underperformed the Zacks Consensus Estimate by an average of 2.1% in the trailing four quarters. Let's see what's in store this time.

Factors Weighing on Treehouse Foods

TreeHouse Foods has been witnessing year-over-year declines in both the top and bottom line for two successive quarters now. In the last quarter, the company put a dismal show, with results not only down year over year, but the bottom line also lagging the consensus mark and management's guidance. Earnings were marred by drab sales and gross margin, while sales bore the brunt of the divestiture of the SIF (Canned Soup and Infant Feeding) business that lowered revenues by approximately 2.9%.

Also, the company has been battling industry hurdles like consumers changing preferences that has led to heightened competition and waning store traffic for many food companies. These factors, combined with increased promotional activities create considerable pricing pressure, which remains a threat to TreeHouse Foods' volumes and profit margins. Evidently, third-quarter results were hurt by challenges related to pricing in certain segments (Baked Goods, Beverages and Meals). Also, sales at the Snacks segment declined owing to adverse volume/mix arising out of weak consumer trends and exit of low margin co-pack business.

Additionally, higher freight and commodity costs weighed upon the company's EBITDA (particularly the Beverages and Snacks segments). Owing to the aforementioned hurdles, direct operating income ("DOI") margin in these segments contracted 610 and 480 bps, respectively in the quarter. Also, management expects the division DOI to have a considerable drag on the bottom line in 2017. Moreover, commodity and freight costs are likely to remain high in 2018 as well.

Can TreeHouse 2020 Initiative Provide Respite?

TreeHouse Foods announced TreeHouse 2020 strategic plan in second-quarter 2017. The plan has been designed to restructure and realign the business as a whole. Along with cost savings, the initiative is expected to improve management of the company's category and customer portfolio, as well as optimize its supply chain.  The plan will be carried out through a series of phases in the next few years. Notably, this initiative is expected to improve the company's operating margin by 300 bps by the end of 2020.

Final Thoughts & Q4 Expectations

While the company remains on track with its TreeHouse 2020 plan, management believes that it needs to take additional steps to enhance its position. Also, management expects the aforementioned headwinds to linger, which compelled it to curtail its earnings outlook for 2017, which also makes us apprehensive about fourth-quarter results. Adjusted earnings for the year are expected in the band of $2.70 to $2.80 per share. Additionally, management projected adjusted earnings for the fourth quarter in a range of 91 cents to $1.01 per share.

Further, the current Zacks Consensus Estimate for the quarter under review is pegged at 93 cents, which shows an 18.4% decline from $1.14 recorded in the year-ago period. This estimate has remained stable in the last 30 days. Moreover, analysts polled by Zacks expect revenues of $1,686 million, down 5.1% from the year-ago quarter.

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