Will Soft Sales & Margins Hurt Newell's (NWL) Q3 Earnings?

Newell Brands Inc. (NYSE:NWL) is slated to report third-quarter 2018 results on Nov 2, before the opening bell.

A glimpse of the company’s earnings performance shows that it has outpaced estimates in the last three quarters. Also, it delivered an average positive earnings surprise of 7.7% in the trailing four quarters.

However, the Zacks Consensus Estimate of 26 cents per share for the third quarter mirrors a plunge of more than 69% from 86 cents registered in the year-ago quarter. Notably, the consensus mark was revised downward over the past seven days. Let’s find out what’s in store for Newell in the upcoming earnings release.

Factors at Play

Newell has been grappling with lower core sales, adverse pricing and commodity cost inflation, which are hurting its top-line performance. Evidently, sales lagged estimates in three of the trailing four quarters, including the last reported quarter. Apart from missing the estimates in second-quarter 2018, the metric declined 12.8% year over year on account of the new revenue recognition standard and adverse impact of last year’s divestitures. The Baby division’s disrupted business along with a significant inventory destocking in the Writing division’s office superstore and distributive trade channels further affected the company’s top line. Additionally, core sales were hurt by a sharp decline in the Learning & Development segment (Writing and Baby) and weakness across the coolers, tents and fresh preserving businesses due to the late arrival of Spring across most parts of the United States.

Management expects core sales to be down low-single digits in the third quarter. Further, the Zacks Consensus Estimate for third-quarter revenues stands at $2,323 million, reflecting a decline of 36.7% from the year-ago period.

Meanwhile, Newell has been witnessing weak margins for the past few quarters. Despite gains from cost synergies and savings, the absence of earnings related to divested businesses, commodity cost inflation, adverse product mix as well as increased advertising, promotion and e-commerce investment have been weighing on its margins. Although the company anticipates the second half of 2018 to be less severe than the first half, it still expects the retail backdrop to remain challenging. These factors may act as a headwind to the company’s third-quarter results as well.

Consequently, shares of Newell have plunged 59.5% in a year, wider than the industry’s 15.9% decline.

Nevertheless, Newell’s Transformation Plan and robust brand portfolio are encouraging. The company remains focused on the execution of Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-saving plans. Also, it aims at right-sizing the cost structure for anticipated smaller net sales and recovering synergies lost through the divestitures. These efforts are expected to improve the company’s operational performance and boost its shareholder value.

Zacks Model

Our proven model does not show that Newell is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Newell has an Earnings ESP of -2.55% and a Zacks Rank #5 (Strong Sell), which makes surprise prediction difficult.

We caution against stocks with a Zacks Ranks #4 (Sell) or 5 going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Archer Daniels Midland Company (NYSE:ADM) has an Earnings ESP of +3.85% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corporation (NYSE:RL) has an Earnings ESP of +0.23% and a Zacks Rank #2.

Monster Beverage Corporation (NASDAQ:MNST) has an Earnings ESP of +3.01% and a Zacks Rank #3.

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