The consumer staples sector is facing several hiccups over the past few quarters as consumers are spending less and demand is declining. Investors can still expect a healthy return in this sector by investing in TreeHouse Foods Inc. (THS, Financial) as this player is playing well despite of all odds.
About this great player
TreeHouse is a food manufacturer servicing primarily the retail grocery and foodservice distribution channels. The company's products include non-dairy powdered creamers, private label canned soups, salad dressings and sauces, powdered drink mixes, hot cereals, macaroni and cheese, skillet dinners, Mexican sauces, jams and pie fillings, pickles and related products, aseptic sauces, refrigerated salad dressings, and liquid non-dairy creamer. It is the largest manufacturer of pickles and non-dairy powdered creamer in the United States, and the largest manufacturer of private label salad dressings, powdered drink mixes, and instant hot cereals in the United States and Canada, based on sales volume.
The company manufactures and sells private label products to retailers, such as supermarkets and mass merchandisers, for resale under the retailers' own or controlled labels; private label and branded products to the foodservice industry. TreeHouse operates in three segments: North American Retail Grocery, Food Away From Home, and Industrial and Export. This player has a broad portfolio across dry groceries and is a leader in 18 grocery categories shown below.
A look at the recent performance
On Nov. 6, the Oak Brook, Illinois-based company reported third quarter adjusted earnings per share, which increased 8.5% to $0.89 compared to $0.82 in the prior year. Adjusted EBITDA for the quarter was $103.5 million, a 32.7% increase compared to the prior year. Improved volume/mix and acquisitions are the main catalysts for the increase in adjusted EBITDA. Net sales jumped to $795.7 million compared to $567.2 million last year, an increase of 40.3%, largely due to sales from acquisitions and favorable volume/mix in each of its segments.
Gross margins in the third quarter decreased to 19.9% from 20.3% last year. This is mainly because of lower margin business from acquisitions, and the related acquisition and integration costs offset an improved sales mix and operational efficiencies. Unfavorable foreign exchange rates also contributed to the decrease. Selling, distribution, general and administrative expenses increased $30.8 million in the third quarter this year, or 47.7%, to $95.5 million from $64.7 million in the same period last year. Further, after considering the impact of acquisition and integration costs in each year, selling, distribution, general and administrative expenses as a percentage of net sales was 10.9% for the third quarter of 2014 compared to 10.7% in 2013.
Other expenses for the third quarter was $17.2 million, an increase from $11.8 million in the same period last year. Income tax expense for the third quarter increased to $10.9 million. Net income for the third quarter totaled $19.9 million, compared to $22.7 million last year. A chart has been provided below to show the company’s segment performance.
Net sales increased in all segments mainly due to the acquisitions, and increase in volume/mix. The direct operating income margin for the third quarter in North American Retail Grocery decreased because of higher acquisition and integration costs compared to the prior year, the impact of unfavorable foreign exchange, increased freight costs and the net impact of lower margin sales from acquisitions. The direct operating income margin for Food Away From Home decreased because of unfavorable foreign exchange and higher input costs. Industrial and Export segment saw a decrease in its direct operating income margin due to higher freight costs.
Positive outlook
The company expects its full year 2014 adjusted earnings per share in the range of $3.60-$3.70. It also expects its average shares outstanding in the fourth quarter to be approximately 43.4 million, while the full year average shares outstanding should be approximately 40.6 million. TreeHouse’s full year 2014 sales will be approximately $3 billion. TreeHouse is also planning more and more improvements in the long run.
Playing strategically
To strengthen its position in the food industry, TreeHouse has acquired Protenergy Natural Foods, developer and manufacturer of food and beverage products, namely private label broth, soups and gravy in May. In June, it acquired Flagstone Foods, the provider of private label healthy snacks. These two remarkable acquisitions will be fully reflected in its fourth quarter results. TreeHouse has grown successfully through acquisitions, which is shown below.
On a concluding note
TreeHouse has mainly focused on innovation, which has paved the way to secure a strong position in this volatile market which is shown below.
Source: Company website
The company’s private label has gained share with continued expectations for growth. It has a solid financial position with good cash flow from operations, and strong revenue growth. Further, TreeHouse is winning retailers with both brands and private label, and its recent acquisitions will also add a good growth opportunity. I feel bullish that this leading manufacturer will continue its trend and won’t let its valued investors down in the long run.
