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TreeHouse Foods Up 21% in 3 Months, Cost Savings a Key Driver

Zacks Equity Research

TreeHouse Foods, Inc. THS is fighting rising commodity and freight costs with efficient restructuring and streamlining efforts to boost savings. Well, such moves are aiding this Zacks Rank #3 (Hold) company to raise investors’ optimism, evident from the stock’s 21.3% rally in the past three months, against the industry’s decline of nearly 10%. Let’s take a closer look into the aspects fueling the company’s bull-run.

Efforts to Induce Savings

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 optimize the company’s portfolio as well as supply chain.  Further, the company is focused on trimming its segments from five to four and is on track to consolidate operating locations. Progressing along these lines, the company recently announced intention to close St. Louis office. Going ahead, management expects that the 2020 plan will improve the company’s operating margin by nearly 300 basis points (bps) by the end of 2020.

In relation with 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. We note that during the third quarter of 2018, Structure to Win savings exceeded the full-year target of $30 million. The company expects that current financial year savings from this program can even exceed $55 million, which was the initial exit run-rate target.



Efforts to Boost Customer Base

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, the company 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 contribute more than 21% to 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 Continue to Mitigate Headwinds

We note that higher commodity and freight costs have been pressurizing the company’s operating margin for a while. Unfortunately, these headwinds are expected to persist in the forthcoming periods. In fact, several other food companies like United Natural Foods UNFI, McCormick & Company MKC and Tyson Foods TSN are grappling with similar headwinds.

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 resulting from stiff competition along with adverse foreign currency fluctuations is a concern.

Nevertheless, we expect that the company’s well-chalked efforts to boost savings and improve portfolio will continue to cushion these hurdles.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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