Treehouse Foods Proves Its Strength in Inflationary Environment; Shares Still a Bargain

While we expected a migration back to private label (at the expense of branded fare driven by inflation), this development seemed to surprise the broader market, with shares of no-moat Treehouse Foods trading up by a midteens rate after its first-quarter earnings report. Treehouse stands to be a beneficiary of the inflationary environment, with private label unit shares now above prepandemic levels (per IRI). In this context, Treehouse reported net sales growth of 7.9%, with an 11.7% increase from pricing partially offset by a 3.7% decrease from volume/mix. While additional pricing actions are slated for the third quarter, we do not expect price hikes to dampen demand, given elevated price levels and a higher-than-historical price gap between national and private brands that should continue in upcoming quarters. Against this backdrop, labor and supply chain constraints continue to temper Treehouse’s ability to service demand fully, with the current service level hovering around 90%, lower than its 98.5% target. This factor, along with commodity and freight inflation, pressured margins in the quarter, with a 460-basis-point downdraft in the adjusted EBITDA margin (to 5%). However, we think management is pulling the proper levers by securing backup ingredient suppliers and seeking reformulation efforts with customers to alleviate these challenges, and we suspect service levels will improve in the back half of the year as supply issues abate.