Treehouse Foods, Inc. THS remains on track with its TreeHouse 2020 strategic plan, which is likely to boost margins and improve the company’s bottom line.
The plan was announced in the second quarter of 2017 with an intention to restructure and realign the business as a whole. TreeHouse 2020 plan aims to improve the company’s operating margin by 300 bps, by the end of 2020. The plan focuses on undertaking complete business integration and expense reduction. The company plans to invest these savings in market differentiated capacities to cater to consumers’ ever-changing demands.
Also, the company remains on track to close certain facilities, shut at least 15 production lines and complete the rollout of the TreeHouse Management Operating System in 2018. It looks like the focus on TreeHouse 2020 and an expected annual savings of about $55 million from the company’s Structure to Win plan has raised investors’ confidence in TreeHouse Foods’ stock. Evidently, shares of the Zacks Rank #3 (Hold) company have surged 36% in the past three months, against the industry’s growth of 3.1%.
Apart from the TreeHouse 2020 plan, the company is focused on organic foods as consumers appear to be more interested in foods described as being “better for you,” which include fresh or freshly prepared foods, and natural, organic, or specialty foods. Moreover, Treehouse Foods has witnessed positive comparable store sales growth trends in food away from home outlets, which mainly focus on clean ingredients and labels, resulting in higher demand for “natural” or organic type products. Notably, premium, better for you, and natural and organic offerings now form more than 21% of the company’s sales.
High Costs Pose as Headwinds
However, the company has been witnessing lower direct operating income (DOI) margin for the past three quarters, owing to higher commodity and freight costs. During the first quarter, division DOI margin contracted 270 bps year over year to 8.9%, due to volume/mix impacts, unfavorable pricing with respect to the rising commodity expenses, escalated freight expenses and impact from SKU rationalization. In fact, DOI margins declined in all segments, except Meals. Management expects increased freight and commodity costs to remain headwinds for some time now. These barriers also weighed on management’s guidance for the second quarter.
Nevertheless, we believe that the above-mentioned initiatives will help TreeHouse Foods counter the cost hurdles and drive the company’s results.
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