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Treehouse Foods Inc - Stock Quote THS

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Morningstar's Treehouse Foods Inc Stock Analysis

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Treehouse Foods Proves Its Strength in Inflationary Environment; Shares Still a Bargain

Analyst Note

| Rebecca Scheuneman, CFA |

While we expected a migration back to private label (at the expense of branded fare driven by inflation), this development seemed to surprise the broader market, with shares of no-moat Treehouse Foods trading up by a midteens rate after its first-quarter earnings report. Treehouse stands to be a beneficiary of the inflationary environment, with private label unit shares now above prepandemic levels (per IRI). In this context, Treehouse reported net sales growth of 7.9%, with an 11.7% increase from pricing partially offset by a 3.7% decrease from volume/mix. While additional pricing actions are slated for the third quarter, we do not expect price hikes to dampen demand, given elevated price levels and a higher-than-historical price gap between national and private brands that should continue in upcoming quarters. Against this backdrop, labor and supply chain constraints continue to temper Treehouse’s ability to service demand fully, with the current service level hovering around 90%, lower than its 98.5% target. This factor, along with commodity and freight inflation, pressured margins in the quarter, with a 460-basis-point downdraft in the adjusted EBITDA margin (to 5%). However, we think management is pulling the proper levers by securing backup ingredient suppliers and seeking reformulation efforts with customers to alleviate these challenges, and we suspect service levels will improve in the back half of the year as supply issues abate.

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Treehouse Foods Inc's Company Profile

Business Description

TreeHouse Foods, the largest private label manufacturer in the U.S., is the product of a slew of acquisitions, the most significant being the 2016 acquisition of Ralcorp, Conagra’s former private brands business. The firm plays in over 25 categories, including snacks like pretzels and cookies, meals like pasta and dry dinners, and single-serve beverages like pods and ready-to-drink coffee. Retailers represent its most significant end-market, where it sells products for resale under retailer brands, but it also serves foodservice customers (providing a similar service as its retail business), industrial (selling bulk food for repackaging and repurposing), and branded consumer goods firms (under co-packing arrangements). Over 90% of its revenue comes from the U.S.

2021 Spring Road, Suite 600
Oak Brook, IL, 60523
T +1 708 483-1300
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings Mar 31, 2022
Fiscal Year End Dec 31, 2021
Stock Type Slow Growth
Employees 10,000