The Stockout: Under Activist Pressure, TreeHouse Foods Exploring Strategic Alternatives

TreeHouse Foods, a major manufacturer of private-label food products, announced that its board is exploring strategic alternatives. Potential strategic actions include a possible sale of the company or the divestment of a significant portion of its less-profitable meal prep business in order to focus on its higher-growth snacking and beverages business. This announcement Monday came after months of activist investor pressure; it was disclosed in February that activist investor Jana Partners held 7.5% of the shares. In March, the company reached an agreement with Jana Partners that included adding two Jana-supported independent directors to the board. 

It has been a rough year for TreeHouse. TreeHouse Foods shares THS are down 14.7% year-to-date and have generally trended lower this year after surging in February with the announcement of Jana's position. TreeHouse has had to cut earnings guidance twice this year and the company's just-reported adjusted third-quarter earnings per share were down 35% year-over-year. The company's original EBIT guidance was $305 million and that guidance is now 45% lower at $165 million. 

TreeHouse sees evidence of private-label brands regaining share as government stimulus payment programs unwind. Since the pandemic began, private-label brands have generally lost share to more expensive national CPG brands, presumably because of government stimulus payments, a lack of spending on travel and other services, and a strong economy that has given consumers more discretionary income. On that topic, management said that it is seeing improved private-label demand so far in the second half of 2021 and presented an interesting graphic (slide 6 of its earnings presentation) showing that private-label sales increased significantly this summer in states that voluntarily opted out of federal stimulus programs early. The states that did not opt out of the federal stimulus programs early are now seeing private-label sales catch up following the expiration of those programs this fall. 

On its analyst call, TreeHouse management said that the gap between the prices of private-label food brands and the national brands is only slightly larger than the average gap and, therefore, rejected the idea that an unusually large price gap is what is causing private-label brands to regain market share. The larger-than-normal price gap seems related to private-label brands having somewhat less pricing power than national brands during the current inflationary environment; the company's prices were 3% higher year-over-year in the 3Q21, which is a relatively modest increase compared to many other food companies. While TreeHouse expects to be able to raise prices to fully offset inflation over the course of the business cycle, the "pricing lag" created a $75 million net headwind for the company in the third quarter. 

TreeHouse has an unusually complex supply chain, which has created more severe headwinds than most other food companies have experienced this year. Supply chain issues have negatively impacted TreeHouse both due to lost sales opportunities ($40 million in unmet demand in the 3Q as a result of not having the right supplies or sufficient labor) and greater-than-expected costs (supply chain disruption resulted in a $60 million cost headwind). Management explained that its supply chain is more complex than most of its peers because it manufactures similar food products at multiple plants, which creates greater demands on its suppliers to move ingredients to more locations and creates more labor challenges when compared to manufacturing food products at one central location. 

In other CPG news, the aluminum can shortage remains a problem for packaged beverage companies. Monster Beverage reported that, during its third quarter, it continued to experience increased aluminum can costs, both due to higher commodity prices as well as higher costs for importing aluminum cans. Plus, the aluminum can shortage resulted in the company struggling to keep up with demand in the U.S. and in Europe, the Middle East, and Africa. The company said that its need for aluminum cans in excess of its contracted volumes with existing suppliers has necessitated sourcing more cans from suppliers in the United States, South America, and Asia. In addition, the company has entered into supply agreements with two additional U.S. aluminum can suppliers.

Cargill is building a specialty fats plant in Malaysia as part of its program to expand its global portfolio of specialty fats production capacity. As reported by Food Business News, the $35 million expansion is part of its multiyear $100 million investment to expand the company's global portfolio in specialty fats. The investment is intended to simplify supply chains and eliminate extra steps associated with purchasing oil from one supplier and then shipping it to another company for further processing. Specialty fats are versatile and can be used in a variety of food products, including chocolates, coatings, fillings, and baked goods. 

Are consumer products supply chains so bad that advertising is no longer worthwhile? That is a question that a recent article in The Wall Street Journal explored. The article cited Hershey, Church & Dwight, and Kimberly-Clark as examples of CPG companies that have reduced their advertising budgets. Kellogg described a similar action last week as a way to manage its inventory levels of products that are in short supply while also offsetting a portion of its rising costs in other areas. That trend also highlights yet another reason why the financials of the national CPG companies are holding up better than the private-label manufacturers — private-label food companies like TreeHouse spend little or nothing on advertising so it's not a cost lever that can be pulled.

Image Sourced from Pixabay