TreeHouse Foods, Inc. (THS - Free Report) has seen its shares surge 22.1% in the past three months, against the industry’s drop of 8.5%. In fact, despite witnessing a decline in revenues and earnings in first-quarter 2018, the company’s shares have rallied about 17% since the quarterly outcome. Thus, let’s delve deeper into what’s been driving investors’ optimism and see if it can sustain.
TreeHouse 2020 Plan: A Major Driver
TreeHouse Foods is on track with its TreeHouse 2020 strategic plan that was announced in second-quarter 2017. The plan, which is designed to restructure and realign the business as a whole, aims to improve the company’s operating margin by 300 bps by the end of 2020 — by undertaking complete business integration and expense reduction. The company expects to invest these savings in market-differentiated capacities to cater to consumers’ ever-changing demands. Also, the company remains on track to close certain facilities, shut at least 15 production lines and complete the rollout of the TreeHouse Management Operating System in 2018. It looks like the focus on TreeHouse 2020 and expected annual savings of about $55 million from the company’s Structure to Win plan has raised investors’ confidence in TreeHouse Foods’ stock.
Focus on Buyouts Bodes Well
TreeHouse Foods has always been focused on expanding its product offerings through acquisitions. In February 2016, the company acquired Private Brands Business from ConAgra Foods for $2.7 billion. The addition of Private Brands has added to the revenues and helped the company to lower debt. The company’s other acquisitions include Flagstone Foods, PFF Capital Group, Inc. (“Protenergy”), Cains Foods, L.P., Associated Brands, and Naturally Fresh, Inc. The company expects to utilize its scale, management depth, integration expertise and access to capital to pursue both small and large acquisitions in the future.
Healthy and Organic Food Offerings Draw Customers
The company focuses on organic foods, as consumers appear to be more interested in foods described as “better for you,” which include fresh or freshly prepared foods, and natural, organic, or specialty foods. Moreover, Treehouse Foods has 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. Notably, premium, better for you, natural and organic offerings now form more than 21% of the company’s sales. In fact, we note that the restaurants and retailers are increasing the use of cage-free eggs, as they are healthy. The company expects sustained growth in these areas and continues to focus on consumer’s needs by developing new formulations, packaging, and sizes.
Can Growth Sustain Amid Cost Hurdles?
TreeHouse Foods’ growth drivers helped it post earnings and sales beat for the second time in a row, in first-quarter 2018. However, results fell year over year. While earnings were hurt by increased freight and commodity costs and soft sales, sales bore the brunt of divestiture of SIF (Canned Soup and Infant Feeding) business. Well, TreeHouse foods has been posting lower DOI margin for the past three quarters, owing to higher commodity and freight costs. During the first quarter, division DOI margin contracted 270 bps year over year to 8.9%, due to volume/mix impacts, unfavorable pricing, with respect to the rising commodity expenses, escalated freight charges and impact from SKU rationalization. Management expects increased freight and commodity costs to remain headwinds for some time now.
Nevertheless, management remains encouraged about exploiting the opportunities in the significant private label space. Also, the company remains focused on curtailing costs and aligning capacities with consumer needs efficiently. We expect such endeavors to continue fueling growth and help retain investors’ confidence in this Zacks Rank #3 (Hold) company.
Looking for More Promising Stocks? Check These
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United Natural Foods (UNFI - Free Report) with a long-term earnings per share growth rate of 8.2%, flaunts a Zacks Rank #2 (Buy).
Conagra Brands (CAG - Free Report) with a long-term earnings per share growth rate of 8%, carries a Zacks Rank #2.
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