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TreeHouse Foods (THS) Hurt by Cost Inflation, Pricing Aids

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TreeHouse Foods, Inc. (THS - Free Report) , like most other food players, is grappling with escalated cost concerns. Commodity, labor and freight cost inflation are acting as hurdles for the company. In a recent release, TreeHouse Foods mentioned that it is open to divesting portions of its operations like the Meal Preparation business. That said, the company is committed to driving growth and enhancing shareholders’ value in the higher-margin Snacking and Beverages business.

TreeHouse Foods has been benefiting from its effective pricing endeavors and gains from acquisitions. The company is also gaining on higher demand from food-away-from-home and co-manufacturing sales channels and new product sales. In the fourth quarter of 2021, higher demand from food-away-from-home and co-manufacturing sales channels was an upside to THS’ sales in the Meal Preparation segment. With outdoor dining coming back into the picture and restrictions being lifted, we believe the away-from-home food demand will continue to rise and serve as a tailwind.

The Zacks Consensus Estimate for 2022 sales and earnings suggests growth of 10.2% and 17.7%, respectively. Let’s delve deeper into all aspects.

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

TreeHouse Foods, Inc. Price, Consensus and EPS Surprise

TreeHouse Foods, Inc. price-consensus-eps-surprise-chart | TreeHouse Foods, Inc. Quote

Cost Headwinds & Q1 View

In the fourth quarter of 2021, TreeHouse Foods’ gross margin of 14.7% contracted 470 basis points (bps) from the year-ago quarter’s figure. The decline was caused by supply-chain disruptions, leading to higher labor costs, supply shortages and commodity inflation.  Adjusted EBITDA from continuing operations slumped 47.3% to $81.2 million as pricing actions did not fully offset elevated costs resulting from labor shortages and supply-chain disruptions. This led to commodity and freight cost inflation. The adjusted EBITDA margin declined 610 bps to 7% in the reported quarter.

Management expects limitations on its ability to cater to demand to persist through at least the first half of 2022. It also expects labor shortages and supply-chain woes to hurt revenues and profits in the same period. Commodity and freight cost inflation is expected to escalate in 2022. Although TreeHouse Foods’ adjusted EBITDA view for 2022 suggests year-over-year growth, the company expects the majority of earnings growth to come in the second half of 2022 as labor shortages and supply-chain disruptions are likely to impact profitability and volume in the first half. For the first quarter of 2022, the company anticipates a further decline in the adjusted EBITDA margin (both sequentially and year over year). However, adjusted EBITDA is estimated in the range of $385-$415 million for full-year 2022, indicating growth of 5% at the midpoint.

Zacks Investment Research
Image Source: Zacks Investment Research

Factors Working as Upsides for TreeHouse Foods

In the fourth quarter of 2021, TreeHouse Foods’ top line decreased year over year due to an adverse volume/mix. The top line received a partial respite from 5.6% gains on pricing, which helped recover commodity and freight cost inflation. Gains from the pasta acquisition, higher demand from food-away-from-home and co-manufacturing sales channels, new product sales and favorable Canadian foreign exchange also aided results. The company has been undertaking prudent pricing actions for combating inflationary trends. Pricing actions partly aided THS’ gross margin and adjusted EBITDA in the reported quarter.

The company intends to continue undertaking pricing actions, which are expected to boost net sales in 2022. Also, pricing actions are likely to offset inflation at the end of the first quarter of 2022, which is expected to aid adjusted EBITDA.  Also, TreeHouse Foods expects to benefit from further actions to mitigate the impacts of labor and supply-chain disruptions. This is likely to aid volume and profitability.

Moving on, TreeHouse Foods has always 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. Contributions from this buyout supported TreeHouse Foods’ top line in the fourth quarter of 2021.

For 2022, THS’ net sales are anticipated to increase a minimum of 11% year over year. Net sales for 2022 are expected to mainly benefit from pricing actions, offset by volume constraints stemming from labor shortages and supply-chain disruptions.

Shares of this Zacks Rank #3 (Hold) company have tumbled 23.4% in the past six months compared with the industry’s decline of 0.8%.

Looking for Consumer Staple Stocks? Check These

Some better-ranked stocks are Tyson Foods (TSN - Free Report) , Flowers Foods (FLO - Free Report) and Pilgrim’s Pride (PPC - Free Report) .

Tyson Foods, a renowned meat products company, sports a Zacks Rank #1 (Strong Buy) at present. Shares of Tyson Foods have jumped 8% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and earnings per share (EPS) suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2 (Buy). Shares of Flowers Foods have risen 5.3% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 6%, on average.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen, and value-added chicken and pork products, holds a Zacks Rank #2. Shares of Pilgrim’s Pride have moved down 19.2% in the past six months.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial-year EPS suggests growth of 19.7% from the year-ago reported number. PPC has a trailing four-quarter earnings surprise of 24.9%, on average.

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