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Pinnacle Foods (PF) Posts In-Line Q1 Earnings; Sales Miss

Shares of Pinnacle Foods, Inc. PF declined 1.84% on Apr 28 after the company reported dismal first quarter 2016 results. While earnings matched the Zacks Consensus Estimate, revenues missed the same.

Adjusted earnings of 40 cents per share came in line with the Zacks Consensus Estimate and grew 2.6% from the year-ago period. The upside was supported by double-digit sales growth, improved gross profits through effective productivity programs and favorable productivity mix.

 

 

Quarter in Detail

Net sales of this food company increased 13.4% to $754.3 million in the first quarter. The improvement was driven by a 15.2% benefit from the Boulder Brands acquisition (completed in January) and higher net price realization of 0.1%, partially offset by lower volume/mix of 1.7% and unfavorable foreign currency translation of 0.2%. Sales missed the Zacks Consensus Estimate of $771 million by 2.2%.

The company witnessed decline in both North America Retail, which comprises the Birds Eye Frozen and Duncan Hines Grocery segments and The Specialty Foods segment.

Adjusted gross profit increased 17.4% to $205.7 million. Gross margin also expanded 90 basis points to 27.3%, on the back of improved productivity, favorable product mix and higher net price realization, despite significantly higher product introductory expenses, input cost inflation and higher depreciation expense.

Adjusted earnings before interest and taxes (EBIT) increased 11.8% to $106.8 million. Higher gross profit was partially offset by increased marketing and administrative expenses.

Segment Details

Birds Eye Frozen: Segment sales grew 3.8% to $330.0 million in the first quarter, driven by increased volume/mix and higher net price realization offset by currency headwinds. The company witnessed continued strong performance of the Birds Eye franchise and the gardein brand, partially offset by lower sales of seafood, due to category weakness, and a decline for the Foundation Brand portfolio.

Adjusted EBIT for the segment rose 14.1% to $53.3 million, as net sales growth and productivity savings offset the negative impact from input cost inflation.

Duncan Hines Grocery: Segment sales declined 6.9% to $243.2 million due to lower volume/mix, currency headwinds and lower pricing. During the quarter, sales growth of Vlasic pickles was more than offset by declines of Duncan Hines baking products and Wish-Bone salad dressings, including the impact of higher new product introductory costs.

Adjusted EBIT for the segment declined 11.9% to $41.0 million due to lower volume, significantly higher product introductory expenses, increased depreciation and input cost inflation, partially offset by productivity savings and favorable pricing.

Boulder Brands: Pinnacle completed the acquisition of Boulder Brands on Jan 15, 2016. As a result, Boulder has become a wholly owned subsidiary of Pinnacle.

In the first quarter of 2016, Boulder Brands contributed $100.8 million to net sales. Adjusted EBIT for the Boulder Brands segment totaled $12.2 million.

Specialty Foods: Segment sales declined 6.9% to $80.2 million due to lower net price realization and lower volume/mix, as there were lower sales for private label canned meat and snacks.

Adjusted EBIT decreased 15.2% to $6.7 million in the first quarter of 2016 largely reflecting the impact of the net sales decline and unfavorable product mix.

Outlook

Pinnacle Foods has reiterated its earnings guidance for 2016, which includes the benefit of the Boulder Brands acquisition. It expects adjusted earnings in a range of $2.08 to $2.13, including approximately 5 cents from the Boulder Brands acquisition, up from the prior-year figure of $1.92. Boulder Brands is expected to contribute net sales in a range of $460 million to $480 million.

The company expects input cost inflation in a range of 2% to 3%. Second half inflation is expected to be higher than the first half. Productivity savings is estimated in a range of 3.5% to 4% of costs, including Boulder Brands' organic cost savings but excluding synergies. Second half productivity is expected to be higher than the first half.

Currency is expected to be less of a headwind in 2016, with the impact estimated at about 1 cent.

Overall, the company boasts a strong brand portfolio and intends to continue to invest in innovation to further differentiate its brands in the marketplace. It has also been pursuing various acquisitions over the years to enhance distribution network, customer base and long-term growth.

Pinnacle Foods also has an operational excellence program to generate annual productivity savings across the supply chain. The company has raised its savings target in 2016 to a range of 3.5% to 4% of annual cost of products sold, compared with 3% to 4%, which has been achieved over the last five years. These productivity savings, along with higher pricing, have been mitigating the impact of input cost inflation to drive gross margins.

Pinnacle Foods carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Investors interested in the food industry can also consider stocks like Campbell Soup Company CPB, Flower Foods, Inc. FLO and Kellogg Co. K. While Campbell Soup sports a Zacks Rank #1 (Strong Buy), Flower Foods and Kellogg hold a Zacks Rank #2 (Buy).

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PINNACLE FOODS (PF): Free Stock Analysis Report
 
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