Despite the overall improvement in the U.S. economy, food companies such as TreeHouse Foods, Inc. (THS - Free Report) have been battling industry hurdles like stiff competition and soft traffic along with consumers rapidly changing tastes and preferences. Additionally, TreeHouse Foods has been bearing the brunt of rising freight and commodity costs.
Treading on such rough roads, TreeHouse Foods’ shares have tumbled close to 38.7% in the past six months against the industry’s rise of 2.4%. Also, the company’s performance compares unfavorably with the Zacks Consumer Staples sector and the S&P 500 index’s gain of 2.7% and 12.5%, respectively
In an attempt to combat ongoing hurdles, TreeHouse Foods has undertaken several initiatives including business restructuring, focusing on organic food manufacturing and strategic buyouts.
Let’s now take a look into what’s been hurting TreeHouse Foods and the efforts put into place for inducing growth.
Factors Weighing On TreeHouse Foods
Consumers’ changing preferences and the persistent threats emerging from Amazon’s (AMZN - Free Report) ever-growing dominance have led to heightened competition and waning store traffic for many food companies. These factors, combined with increased promotional activities create considerable pricing pressure, which remains a threat to TreeHouse Foods’ sales volumes and profit margins. Apart from TreeHouse Foods, companies like Unilever (UN - Free Report) and Campbell Soup (CPB - Free Report) have also been reeling under such industry headwinds.
In addition to the aforementioned challenges, the divestiture of the SIF (Canned Soup and Infant Feeding) business marred the company’s top line during the third quarter of 2017. Further, escalated commodity and freight expenses significantly weighed upon the company’s operating performance, especially in Beverages and Snacks units.
Unfortunately, management expects these headwinds to linger, which compelled it to curtail 2017 earnings outlook to a band of $2.70-$2.80 per share, compared with the previous range of $3.15-$3.30.
Efforts to Counter Challenges
Adapting to consumers’ changing preferences is considered one of the best ways to keep afloat amid such conditions. To this end, TreeHouse Foods strives to widen organic food offerings, as consumers have been inclining toward healthier food options. Moreover, TreeHouse Foods witnessed positive comparable store sales growth trends in food away from home outlets, which mainly focuses on clean ingredients and labels, resulting in higher demand for “natural” or organic type products. The company expects sustained growth in these areas and has been developing new formulations and products in this category.
Another vital strategic endeavor to improve performance is the TreeHouse 2020 initiative, which was announced in second-quarter 2017. The plan has been designed to restructure and realign the business as a whole in several phases. Along with cost savings, the initiative is expected to augment customer portfolio and optimize supply chain operations. Notably, this initiative is expected to improve the company’s operating margin by 300 bps by the end of 2020.
Further, this Zacks Rank #3 (Hold) company has been constantly expanding product offerings through acquisitions. In February 2016, the company acquired Private Brands Business from ConAgra Foods. The inclusion of Private Brands has added to revenues and has helped the company pay off $470 million in debt over the last five quarters. Other noteworthy acquisitions include Associated Brands, Flagstone Foods and Naturally Fresh, Inc.
Back by such dedicated efforts, TreeHouse Foods is expected to achieve a turnaround in performance and thereby offset present hurdles.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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