TreeHouse Foods Inc. (THS, Financial), a prominent manufacturer and distributor of private label packaged foods and beverages in North America, reaffirmed its growth outlook and provided a comprehensive update on its 2023 guidance during an Investor Day event on June 13.
The company offers over 50 categories of products, including snacks, beverages, condiments, pasta, cereal and frozen foods. TreeHouse Foods serves retail grocery, food service and industrial customers across the U.S. and Canada. The company has undergone significant restructuring and is now positioned as a stronger, more focused business. With a strategic emphasis on high-growth, high-margin categories, it aims to capitalize on the expanding private label food market and deliver improved performance.
Strong growth and improved profitability
TreeHouse Foods has made substantial efforts to streamline its operations and concentrate on its core strengths. The company divested its underperforming meal preparation business, which accounted for a significant portion of sales but struggled with low margins and operational challenges. This move has enabled TreeHouse to become a leaner and more profitable organization, focused on creating exceptional private label products for its retail partners.
For the first quarter of 2023, the company reported net sales of $894.80 million, representing a substantial increase of 15.8% year over year. One of the key drivers of this strong performance was TreeHouse’s ability to fight inflation through pricing decisions. The company has seen notable progress in key areas, including improved vendor fill rates and the easing of supply chain constraints. These operational improvements have enabled TreeHouse to increase capacity in previously constrained categories, enhance service levels and fulfill customer orders more efficiently.
The company’s growth is driven by its strategic focus on faster-growing, higher-margin categories like private label growth, which aligns well with the current macro environment and continues to support this market segment. TreeHouse is a private brand powerhouse in the snacks and beverage industry with a portfolio spanning 17 categories, positioning it as a significant player. The snacking and beverage market itself is both large and growing, with retail sales surpassing $270 billion. This category has experienced a robust growth rate of 10.80% in the last year, while private brands within this segment reported even stronger growth at 14.40%. This trend is driven by consumers increasingly choosing private brand options, particularly among millennials and gen Z customers, pointing to a promising future for TreeHouse.
A survey conducted by the company revealed 45% of respondents reported purchasing more private brand foods and beverages in the past six months, while 50% indicated their purchases remained consistent. Only 5% reported a reduction in private brand purchases. This consumer preference for private brands aligns with TreeHouse's position as it aims to further enhance its market share.
TreeHouse Foods has successfully regained private brand unit share across various categories, surpassing pre-pandemic levels, which reflects its adaptability in meeting changing consumer demands and market dynamics. To support its growth and drive operational efficiencies, the company is targeting approximately $250 million in supply chain gross savings from 2024 to 2027. This focus on optimizing the supply chain will enable the company to enhance its cost structure and improve profitability.
Further, TreeHouse has identified specific categories as growth platforms that present significant opportunities. For instance, baked snacking, accounting for around 30% of net revenue, holds a total addressable market of over $38 billion and is expected to grow at a compounded annual growth rate of 6% in the next five years. The coffee and ready-to-drink tea segment, a 10% share of net revenue, represents a TAM of over $37 billion and is expected to grow at a CAGR of 5%.
On June 7, TreeHouse Foods announced a deal with Farmer Brothers Company, a renowned coffee supplier. This strategic move will not only expand the company's coffee business capacity, but also position it to leverage the growth opportunities in the category effectively. The coffee category boasts a substantial total addressable market of over $23 billion. Furthermore, the category has been experiencing robust growth, primarily driven by the increasing popularity of specialty and single-serve beverages. By acquiring Farmer Brothers' coffee facility and the associated non-direct store delivery coffee business, TreeHouse Foods is strategically positioning itself to capitalize on this growth trend.
Other growth platforms include aseptic products (10% of net revenue), dry blends and pickles (30% of net revenue) and frozen and refrigerated offerings (20% of net revenue), each with substantial TAM and positive growth expectations.
As major retailers increasingly prioritize expanding their private label store brands, TreeHouse Foods is well-positioned to capitalize on this trend. The demand for private label products has been accelerated by factors such as price increases, economic uncertainties and the desire for exclusive offerings in stores. TreeHouse Foods, with its extensive portfolio and partnerships with leading retailers like Costco Wholesale Corp. (COST, Financial), Walmart Inc. (WMT, Financial) and Amazon.com Inc. (AMZN, Financial), stands as a key player in the private label food segment.
At the Investor Day event, TreeHouse Foods unveiled growth targets for the 2024 to 2027 period. The company is aiming for revenue growth in the range of 3% to 5%, along with adjusted Ebitda growth of 8% to 10%. Additionally, TreeHouse plans to generate free cash flow exceeding $200 million.
Takeaway
TreeHouse Foods has successfully repositioned itself as a stronger and more focused company, capitalizing on the growing private label food market. With a robust strategy in place, the company aims to drive sustainable growth and improve financial performance. While the stock performance may not yet reflect the company's improved prospects, industry experts and analysts recognize the potential for long-term success. The market's increasing receptiveness to private label products, coupled with the continued consumer interest in value and affordability, provides a favorable environment for the copmany to further enhance its market presence.
With optimized supply chains and strategic initiatives, TreeHouse Foods is well-positioned for continued growth and profitability.
