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TreeHouse Foods (NYSE:THS) Misses Q4 Sales Targets


Full Report / February 16, 2024

Private label food company TreeHouse Foods (NYSE:THS) fell short of analysts' expectations in Q4 FY2023, with revenue down 4.8% year on year to $910.8 million. Next quarter's revenue guidance of $795 million also underwhelmed, coming in 11.4% below analysts' estimates. It made a non-GAAP profit of $0.77 per share, improving from its loss of $0.41 per share in the same quarter last year.

TreeHouse Foods (THS) Q4 FY2023 Highlights:

  • Revenue: $910.8 million vs analyst estimates of $925.2 million (1.6% miss)
  • EPS (non-GAAP): $0.77 vs analyst estimates of $0.73 (6.1% beat)
  • Revenue Guidance for Q1 2024 is $795 million at the midpoint, below analyst estimates of $897.1 million
  • Management's revenue guidance for the upcoming financial year 2024 is $3.47 billion at the midpoint, missing analyst estimates by 2.8% and implying 1% growth (vs 4.7% in FY2023)
  • Management's adjusted EBITDA guidance for the upcoming financial year 2024 is $375 million at the midpoint, missing analyst estimates of $390 million by 3.8%
  • Free Cash Flow of $80.5 million, up 110% from the previous quarter
  • Gross Margin (GAAP): 16.7%, up from 14.3% in the same quarter last year
  • Organic Revenue was down 8% year on year
  • Sales Volumes were down 3.9% year on year
  • Market Capitalization: $2.36 billion

Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE:THS) produces a wide range of private-label foods for grocery and food service customers.

Private-label products refer to goods that are produced by one company (Treehouse) and then branded and sold under another company's brand (a grocer’s store brand, for example). The grocer’s rationale for offering private label products is usually control over product design and production as well as the higher margins associated with private label goods.

TreeHouse Foods was founded in 2005 as a spin-off of dairy company Dean Foods. Today, the company’s private label production capabilities encompass crackers, creamers, single-serve beverages, broths/stocks, and in-store bakery items like cookies, among other products. Overall, though, cereals, pasta, and dressings are its top-selling categories.

TreeHouse Foods’ customers are mainly grocery stores and food service businesses such as corporate cafeterias. These customers typically choose TreeHouse because of its expertise in the private label arena and its broad portfolio of offerings. End consumers may not be familiar with the TreeHouse brand but if you’ve ever purchased a store brand or picked up an unbranded item at a cafeteria, chances are you’ve consumed one of the company’s products.

Packaged Food

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences.The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors in the private label manufacturing business include B&G Foods (NYSE:BGS), J&J Snack Foods (NASDAQ:JJSF), and private company Cott Corporation.

Sales Growth

TreeHouse Foods is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.

As you can see below, the company's revenue has declined over the last three years, dropping 7.6% annually as consumers bought less of its products.

TreeHouse Foods Total Revenue

This quarter, TreeHouse Foods missed Wall Street's estimates and reported a rather uninspiring 4.8% year-on-year revenue decline, generating $910.8 million in revenue. The company is guiding for a 6.9% year-on-year revenue decline next quarter to $795 million, a reversal from the 15.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 4.8% over the next 12 months, an acceleration from this quarter.

Volume Growth

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether TreeHouse Foods generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, TreeHouse Foods's average quarterly sales volumes have shrunk by 2.9%. This decrease isn't ideal as the quantity demanded for consumer staples products is typically stable. Luckily, TreeHouse Foods was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 9.8% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren't sustainable over the long term unless the business is really really special. TreeHouse Foods Year-On-Year Volume Growth

In TreeHouse Foods's Q4 2023, sales volumes dropped 3.9% year on year. This result was a further deceleration from the 2.2% year-on-year decline it posted 12 months ago, showing the business is struggling to push its products.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

This quarter, TreeHouse Foods's gross profit margin was 16.7%, up 2.4 percentage points year on year. That means for every $1 in revenue, a chunky $0.83 went towards paying for raw materials, production of goods, and distribution expenses. TreeHouse Foods Gross Margin (GAAP)

TreeHouse Foods has poor unit economics for a consumer staples company, leaving it with little room for error if things go awry. As you can see above, it's averaged a paltry 15.9% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 19.1% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

This quarter, TreeHouse Foods generated an operating profit margin of 4.6%, down 2.6 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.

TreeHouse Foods Operating Margin (GAAP)

Zooming out, TreeHouse Foods was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer staples business, producing an average operating margin of 2%. However, TreeHouse Foods's margin has improved by 4.7 percentage points on average over the last year, an encouraging sign for shareholders. The tide could be turning.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, TreeHouse Foods reported EPS at $0.77, up from negative $0.41 in the same quarter a year ago. This print beat Wall Street's estimates by 6.1%.

TreeHouse Foods EPS (Adjusted)

Between FY2020 and FY2023, TreeHouse Foods's EPS grew 17.9%, translating into a decent 5.6% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 61.9% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

TreeHouse Foods's free cash flow came in at $80.5 million in Q4, representing a 8.8% margin. This result was great for the business as it flipped from cash flow negative in the same quarter last year to positive this quarter.

TreeHouse Foods Free Cash Flow Margin

While TreeHouse Foods posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, TreeHouse Foods's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer staples sector, averaging negative 3.3%. However, its margin has averaged year-on-year increases of 7.7 percentage points over the last 12 months, showing the company is at least improving.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

TreeHouse Foods's five-year average ROIC was 2.2%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, TreeHouse Foods's ROIC has stayed the same over the last two years. If the company wants to become an investable business, it will need to increase its returns.

Key Takeaways from TreeHouse Foods's Q4 Results

It was encouraging to see TreeHouse Foods slightly top analysts' EPS expectations this quarter. That stood out as a positive in these results. On the other hand, organic revenue was weak and below expectations. Also, its revenue and adjusted EBITDA guidance for the coming year both missed analysts' expectations. Overall, the results could have been better. The company is down 4.3% on the results and currently trades at $40.94 per share.

Is Now The Time?

TreeHouse Foods may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of TreeHouse Foods, we'll be cheering from the sidelines. Its revenue has declined over the last three years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its gross margins make it more challenging to reach positive operating profits compared to other consumer staples businesses. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically.

TreeHouse Foods's price-to-earnings ratio based on the next 12 months is 16.7x. While we've no doubt one can find things to like about TreeHouse Foods, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $43.29 per share right before these results (compared to the current share price of $40.94).

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