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High Retail Demand Aids TreeHouse Foods (THS), Cost Woes Stay

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TreeHouse Foods, Inc. (THS - Free Report) appears to be well placed, courtesy of its solid focus on enhancing the brand portfolio. Moreover, the company’s retail business has been benefiting from burgeoning demand due to the pandemic-led stockpiling and higher at-home consumption. These upsides have been helping this manufacturer of consumer-packaged food and beverage battle softness in the food away-from-home channel. Additionally, high COVID-19 costs have been concerning for TreeHouse Foods. Let’s delve deeper.

Factors Working Well for TreeHouse Foods

TreeHouse Foods has been focused on expanding its product offerings through acquisitions. In December 2020, the company concluded the buyout of the majority of Riviana Foods’ U.S. branded pasta portfolio. This acquisition is likely to contribute 20-30 cents per share in the first full year. Further, management expects normalized revenues of the acquired business in the range of $170-180 million, while normalized EBITDA is envisioned in a band of $25-$30 million, before including synergies.

Notably, the buyout will add regional brands, including Skinner, No Yolks, San Giorgio and P&R Procino-Rossi, among others, to TreeHouse Foods’ existing portfolio.

In February 2016, TreeHouse Foods acquired Private Brands business for $2.7 billion. The Private Brands business is a leading manufacturer of private-label refrigerated and shelf-stable products in the bars, bakery, cereal, condiments, pasta and snacks categories. On the flip side, the company remains committed to exiting underperforming businesses and shifting focus to areas with high growth potential. To this end, the company offloaded two of its in-store bakery facilities to Rich Products Corporation in April 2020. Further, TreeHouse Foods completed the divestiture of the Snack business to Atlas Holdings on Aug 1, 2019.

Apart from this, TreeHouse Foods has been benefiting from rising demand due to coronavirus-led stockpiling and increased at-home consumption. This has been aiding the company’s retail business, which grew 7% in third-quarter 2020. During the quarter, organic sales grew 0.7% owing to higher volume/mix, backed by elevated retail demand amid the pandemic. This along with improved gross margin and lower operating costs aided the company’s bottom line, which advanced 29% year over year to 71 cents, beating the Zacks Consensus Estimate of 61 cents.

Several other food companies like B&G Foods (BGS - Free Report) , Conagra (CAG - Free Report) and General Mills (GIS - Free Report) have been seeing high retail demand amid the pandemic. Meanwhile, TreeHouse Foods remains encouraged with its operations amid the pandemic-led burgeoning demand. The company remains optimistic about its prospects in the private-label space and sustained momentum for at-home food consumption. The company expects continued eat-at-home trends and elevated grocery demand. For 2020, net sales are anticipated to be $4.2-$4.4 billion, while adjusted earnings from continuing operations are expected to be $2.65-$2.75 per share. Net sales for the fourth quarter are expected in a band of $1.11-$1.17 billion. Further, management expects adjusted earnings from continuing operations of $1-$1.1 per share.

Roadblocks

The company has been reeling under softness in the food away-from-home channel owing to increased social distancing and at-home consumption amid the pandemic. During the third quarter of 2020, the food away-from-home business tumbled 22% and affected the company’s net sales, which came in at $1,045.7 million, lagging the consensus mark of $1,066 million and declining 1.1% year over year. This was mainly accountable to distribution losses and weakness in food-away-from-home demand. This channel is likely to remain weak, given the continuation of stay-at-home trends.

Additionally, TreeHouse Foods has been incurring high costs associated with COVID-19. During the third quarter, the company spent $26 million as costs related to the pandemic. These include costs associated with greater production shifts, increased sanitization measures, supplemental payments and protective equipment. Persistence of such elevated costs remains a concern. Also, the company is cautious about the impacts of a tight labor market and supply limitations on the fourth-quarter results.

Nonetheless, the abovementioned upsides are likely to help TreeHouse Foods counter these challenges.

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