TreeHouse Foods Gains on Restructuring Plans Amid Cost Woes

TreeHouse Foods, Inc. THS is a preferred pick for investors, thanks to its solid restructuring initiatives, focus on acquisitions and efforts to enhance organic food offerings. These efforts enable the company to stay firm amid hurdles like escalated costs and stiff competition.

Markedly, shares of TreeHouse Foods have rallied 36.2% in the past six months against the industry’s decline of 6.1%.

Let’s take a closer look of the aforementioned aspects and see if these growth efforts can help sustain momentum for this Zacks Rank #3 (Hold) stock.You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.

Factors Driving TreeHouse Foods

The company is gaining from its solid restructuring initiatives. To this end, TreeHouse Foods’ Structure to Win program focuses on aligning the company’s SG&A expenses with its division structures. This, in turn, is likely to enrich customers’ experience. In fourth-quarter 2018 results, the bottom line benefitted from the Structure to Win initiative and other cost-saving efforts. Markedly, the company generated Structure to Win savings of $75 million in 2018, which exceeded its original full-year target of $30 million and run-rate target of $55 million. TreeHouse Foods expects to maintain the solid cost control in 2019, wherein it anticipates the Structure to Win plan to help cut SG&A expenses.

The company is on track with its TreeHouse 2020 strategic plan that was announced in second-quarter 2017. Alongside cost savings, the initiative is expected to manage the company’s portfolio, and optimize production and supply chain. The plan aims to improve TreeHouse Foods’ operating margin by 300 basis points (bps) by the end of 2020, by undertaking complete business integration and expense reduction.

Given consumers’ changing preferences, the company has increased focus on organic foods. Notably, TreeHouse Foods has witnessed positive comparable store sales growth trends in food away from home outlets, which mainly focus on clean ingredients and labels. This results in higher demand for “natural” or organic type products. Moreover, premium, better for you, natural and organic offerings now form more than 21% of the company’s sales. These factors along with efforts to expand portfolio through acquisitions should improve TreeHouse Foods’ sales.

Hurdles Likely to be Offset

TreeHouse Foods’ fourth-quarter 2018 results marked its seventh consecutive quarter of year-over-year sales decline. During the quarter, net sales of $ 1,481.1 million missed the consensus mark of $1,493 million and tumbled almost 12.9% year over year. The downside was caused by rationalization of low margin SKUs, divestiture of McCann's business, adverse volume/mix and foreign currency headwinds. Volume/mix at most segments was hampered by stiff competition. The company expects soft volumes to linger in 2019, with Meals and Snacks divisions being weak in particular.

Additionally, TreeHouse Foods has been posting lower division DOI for the past few quarters, owing to higher commodity and freight costs, among other factors. During the fourth quarter, division DOI declined due to a major volume loss in the Snacks unit and some hurdles in the Beverages segment. Commodity costs also had an adverse impact on TreeHouse Foods’ gross and EBITDA margins. Unfortunately, these headwinds are expected to linger in 2019. Well, many other food companies like Campbell Soup CPB, Kraft Heinz KHC and General Mills GIS, among others, are grappling with cost-related hurdles.

Nevertheless, TreeHouse Foods is making aggressive pricing efforts to counter the abovementioned hurdles. We expect such efforts along with the company’s other initiatives to help it retain the robust momentum.

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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.


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