TreeHouse Foods, Inc. THS has been navigating through rough waters for a while now, owing to sluggish performance of Baked and Meal Solutions units. This also impacted results in second-quarter 2019, which hurt investor sentiment. Markedly, shares of this Illinois-based company have decreased approximately 15% in the past six months compared with the industry’s growth of 9.4%.
Nevertheless, the company’s focus on its strategy for 2020 bodes well. Additionally, it is on track with its Structure to Win program, which is aimed at cutting costs. This apart, we commend TreeHouse Foods’ focus on refining portfolio through buyouts and innovation.
Hurdles in TreeHouse Foods’ Path
TreeHouse Foods is witnessing weakness in Baked and Meal Solutions units. Sales at Baked segment fell 6.9% year over year in the second quarter due to SKU rationalization, adverse volume/mix and currency. Net sales at Meals solutions unit declined almost 9.3% in the second quarter owing to SKU rationalization efforts, impacts from the divestiture of McCann’s business, adverse volume/mix and currency rates.
Further, overall net sales missed the Zacks Consensus Estimate and decreased year over year. The downside was caused by SKU rationalization of low-margin businesses and the divestiture of McCann. This, along with management’s unimpressive outlook for the third quarter, raises concerns.
Management expects third-quarter 2019 adjusted earnings in the range of 52-62 cents and net sales in the band of $1.04-$1.14 billion. The company delivered adjusted earnings per share of 62 cents in the third quarter of 2018, wherein net sales came in at roughly $1.4 billion.
Can Efforts Aid a Turnaround?
TreeHouse Foods is progressing well with the Structure to Win program, which focuses on aligning SG&A expenses with division structures. Markedly, the company generated Structure to Win savings worth $75 million in 2018, which exceeded original full-year target of $30 million and run-rate target of $55 million. It expects to maintain solid cost control in 2019, wherein it anticipates Structure to Win plan to continue yielding. This will enable TreeHouse Foods to cut SG&A expenses, which were earlier expected to decline by nearly $20 million (on a net basis) in 2019.
Additionally, the company is on track with TreeHouse 2020 strategic plan that was announced in second-quarter 2017. Alongside cost savings, the initiative is expected to manage the company’s portfolio and optimize production and supply chain. The plan aims to improve operating margin by 300 basis points (bps) by the end of 2020, through complete business integration and expense management.
Apart from this, the company is trying to bolster footing in the organic foods space. Furthermore, it focuses on expanding product offerings through acquisitions. Some of the noteworthy buyouts include Private Brands, Flagstone Foods, and Naturally Fresh, Inc.
Notably, the company remains committed toward exiting underperforming businesses and shifting focus toward areas with high growth potential. To this end, management is on track with the sale of ready-to-eat cereal business to Post Holdings POST, which was announced earlier. The ready-to-eat cereal unit is part of the company’s baked goods segment. Also, with respect to its Snacks division, management announced that it has completed the divestiture of snack nuts and trail mix business to Atlas Holdings for $90 million in the second quarter. As a result, these businesses will form part of TreeHouse Foods’ discontinued operations from the beginning of the third quarter.
These divestitures are expected to be accretive by nearly 19 cents to the bottom line in 2019. We believe, the aforementioned tailwinds have the potential to bring this Zacks Rank #3 (Hold) stock back on growth trajectory.
Check These Solid Food Stocks
General Mills GIS, with a Zacks Rank #2 (Buy), has a long-term EPS growth rate of 7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MEDIFAST MED, also with a Zacks Rank #2, has delivered positive earnings surprise in the trailing three quarters.
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