TreeHouse Foods (THS, Financial) is trading lower today despite reporting strong Q2 results. The major private label food and beverage supplier significantly beat EPS expectations, marking its largest beat since Q1 2023, and rebounded nicely from a Q1 miss. Although adjusted EBITDA fell 7.5% year-over-year to $70.6 million, this was well above the prior guidance of $55-65 million. THS also provided in-line Q3 revenue guidance and reaffirmed FY24 revenue projections.
- Revenue fell 1.9% year-over-year to $788.5 million, slightly better than expected. This decline was mainly due to targeted commodity-driven pricing adjustments and unfavorable volume/mix from planned distribution exits in its coffee and in-store bakery categories, as well as the restoration of a broth facility.
- Despite the sales decline, THS is well-positioned at the intersection of two strong consumer trends: the growth of private brand groceries and the shift towards snacking. Many grocery retailers see significant growth potential in private brands and are investing accordingly.
- Walmart, TreeHouse's largest customer, recently launched bettergoods, the largest food and beverage private brand in roughly 20 years. Walmart accounts for 22.4% of 2023 sales. Other brands making significant investments include Kirkland (Costco) and Simple Truth (Kroger). Aldi is also expanding its store base across the US, focusing almost exclusively on private brands.
- Looking ahead, THS has made significant progress in converting pipeline opportunities in the first half of 2024, which should drive volume growth in the second half. This includes wins in cookies, refrigerated dough, pretzels, and pickles. THS has also been enhancing its supply chain through manufacturing efficiencies, procurement savings, and improving its distribution network.
- A headwind in Q1 was the restart of THS's broth business, which impacted profitability. However, the broth production lines are now operational, and the company has upgraded its equipment and processes. As broth season approaches, THS expects this restart to expand margins and boost profitability in the second half of 2024.
Overall, the stock is holding up fairly well. The results were significantly better than Q1, which was partly affected by broth production issues. The large EPS beat suggests analysts might have overestimated the impact of these issues. The current stock weakness appears to be driven largely by overall market conditions.
In the bigger picture, consumers are seeking value to cope with inflation, which benefits private label companies like TreeHouse. While the company has faced operational challenges, these seem to be getting resolved. Additionally, many grocery retailers are investing in private labels. THS's recent wins in the first half of 2024 should help boost volumes in the second half.
