Although stiff competition and rising operational expenses have been plaguing most U.S. food companies, few players like TreeHouse Foods, Inc. (THS - Free Report) have managed to stay afloat on the back of lucrative savings strategies. Further, the company is gaining from efforts to strengthen brands and widen customer reach. Let’s take a closer look.
Robust Plans to Curtail Costs
TreeHouse Foods is on track with the TreeHouse 2020 strategic plan, an initiative 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 engaging in complete business integration and expense reduction.
Speaking of cost optimization, the company’s Structure to Win program is also noteworthy. The 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 the 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 expects savings from the program to exceed the initial exit run-rate target of $55 million.
Focus on Portfolio Expansion
TreeHouse Foods caters to a wide and diverse customer base that includes leading grocery retailers and foodservice operators in the United States as well as 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.
Moreover, the company is trying to expand 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. The company expects sustained growth in these areas and continues to focus on consumer’s needs by developing formulations, packaging and sizes.
Can Efforts Help Tide Over Hurdles?
TreeHouse Foods has been posting lower direct operating income margins since the past four quarters, thanks to higher commodity and freight costs. Unfortunately, these headwinds are expected to persist in the forthcoming periods. 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 is facing negative impacts stemming from the divestiture of McCann's business and efforts to rationalize low margin SKUs. Moreover, adverse volume/mix stemming from stiff competition along with foreign currency headwinds is a persistent headwind.
Although the aforementioned factors are significant headwinds, we hope that efforts to boost savings and efficiency will enable the company to sustain profits. In fact, such dedicated efforts are fueling investors’ optimism in this Zacks Rank #3 (Hold) stock that has gained 9.8% in the past three months, against the industry’s decline of 14.5%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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