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Saving Efforts Likely to Drive TreeHouse Foods Amid Cost Woes

Zacks Equity Research
Although TreeHouse Foods (THS) struggles with high commodity and freight costs, its efforts to rationalize business and boost savings are impressive.

Strategies to curtail costs along with consistent efforts to broaden portfolio have been aiding TreeHouse Foods, Inc. THS to maintain foothold in the food space and keep investors interested. This renowned packaged foods and beverages company’s shares have surged 33.6% in the past six months, compared with the industry’s gain of 3.1%.

However, soft volumes and industry-wide hurdles pertaining to higher commodity as well as freight costs are viable threats to the company’s performance. That said, lets take a look at the factors impacting this Zacks Rank #3 (Hold) company and see if it can maintain position in the green zone.

Strategies to Boost Savings & Induce Efficiency

Management is on track with executing the plans under the TreeHouse 2020 strategic initiative. This plan has been designed to restructure and realign the business as a whole. Alongside cost savings, the initiative is expected to boost the company’s portfolio and optimize production and supply chain. The plan aims to improve the company’s operating margin by 300 basis points 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. In this regard, the company made certain achievements in the first phase of the program. Also, the company is on track to simplify structure, undertake plant consolidation and complete the rollout of the TreeHouse Management Operating System in 2018.

Speaking of efficiency enhancing initiatives, the company has been progressing well with the Structure to Win program. The program is focused on aligning SG&A expenses with division structures. Markedly, management is optimistic about prospects from this program and expects savings from the same to be ahead of the original schedule of nearly $30 million in 2018. The company expects overall run rate savings from this program to be nearly $55 million.

Focus on Organic Offerings

Lately, rising health consciousness has been propelling companies to augment organic and natural offerings. TreeHouse Foods has also been actively bolstering its ‘better for you’ portfolio, which includes fresh prepared foods as well as natural, organic and specialty foods. Notably, premium, better for you, natural and organic offerings now 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 new formulations, packaging, and sizes.

Soft Volumes & High Costs

The divestiture of SIF (Canned Soup and Infant Feeding) business as well as efforts to simplify and rationalize low margin SKUs have been denting the company’s top-line performance for a while. Going ahead, the company expects SKU rationalization efforts and soft volumes across most divisions to continue putting pressure on performance.

Apart from this, TreeHouse Foods has been reporting lower DOI margin since the past four quarters, due to higher commodity and freight costs. Unfortunately, freight and commodity cost headwinds are expected to linger in 2018, which is a persistent threat to margins.

Can Efforts Aid Offsetting Hurdles?

Although the aforementioned factors are hurdles to TreeHouse Foods’ top- and bottom-line performances, we hope that efforts to boost savings and efficiency will prove lucrative in maintaining profitability. Further, the company’s efforts to widen consumer base through the expansion of organic offerings are impressive and are expected to boost revenues.

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The Chefs' Warehouse, Inc. CHEF, with long-term earnings per share (EPS) growth rate of 22%, also carries a Zacks Rank #2.

Pinnacle Foods Inc. PF has long-term EPS growth rate of 8% and a Zacks Rank #2.

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