Amidst rising commodity and freight expenses along with stiff competition plaguing the performance of most U.S. food companies, TreeHouse Foods, Inc. (THS - Free Report) has been striving to stay afloat on the back of savings and efficiency-boosting initiatives. Let’s take a closer look.
Efforts to Drive Efficiency Bodes Well
TreeHouse Foods is on track with the TreeHouse 2020 strategic plan that was announced in second-quarter 2017. The plan has been designed to restructure and realign the business as a whole. Along with cost savings, the initiative is expected to manage the company’s portfolio as well as optimize production and supply chain. The plan aims to improve the company’s operating margin by 300 basis points (bps) by the end of 2020, by undertaking complete business integration and expense reduction.
Additionally, the company’s Structure to Win program focuses on aligning the company’s SG&A expenses with division structures. This is likely to enrich customers’ experience. Results from the program were reflected in third-quarter 2018 results, wherein operating expenses, as a percentage of sales, benefitted from the initiative and other cost-saving efforts. Markedly, management is encouraged about prospects from this program. In fact, through the third quarter, the company generated Structure to Win savings, which exceeded full-year target of $30 million. For 2018, the company projects that savings from the program can exceed the initial exit run-rate target of $55 million.
Sturdy Customer Base & Focus on Augmenting Portfolio
TreeHouse Foods caters to a wide and diverse customer base, including leading grocery retailers and foodservice operators in the United States and Canada. To further boost customer base and strengthen portfolio, TreeHouse Foods frequently engages in acquisitions. Notable buyouts of the company include — Private Brands, Flagstone Foods, Cains Foods, L.P., Associated Brands and Naturally Fresh, Inc.
Further, the company is trying to expand its organic and natural offerings as consumers are more interested in “better for you” food products. Currently, premium, better for you, natural and organic offerings form more than 21% of the company’s sales. In fact, we note that 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.
Will Efforts Offset Headwinds?
TreeHouse Foods has been posting lower DOI margin in the past four quarters, thanks to higher commodity and freight costs. Unfortunately, these headwinds are expected to linger in 2018. In fact, several other food companies like United Natural Foods (UNFI - Free Report) , McCormick & Company (MKC - Free Report) and Tyson Foods (TSN - Free Report) are also grappling with higher freight and transportation costs.
Apart from these, TreeHouse Foods has been grappling with negative impacts stemming from the divestiture of McCann's business and efforts to rationalize low margin SKUs. Moreover, adverse volume/mix owing to stiff competition as well as foreign currency headwinds are a persistent drag.
Although the aforementioned factors are significant headwinds, we hope that efforts to boost savings and efficiency will sustain profitability. In fact, such dedicated efforts have been fueling investors’ optimism in this Zacks Rank #3 (Hold) Stock that gained 15% in the past six months compared with the industry’s 3.5% rise.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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