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TreeHouse Foods (THS -4%) is trading lower today despite reporting upside Q2 results. This huge supplier of private label food and beverages beat handily on EPS, its largest beat since 1Q23 and it was a nice bounce back following a miss in Q1. Adjusted EBITDA fell 7.5% yr/yr to $70.6 mln, but that was well above prior guidance of $55-65 mln. THS also guided Q3 revs in-line and reaffirmed FY24 revs.

• Revenue fell 1.9% yr/yr to $788.5 mln, but that was slightly better than expected. The decline was primarily due to targeted commodity-driven pricing adjustments. Also, THS was dealing with unfavorable volume/mix related to planned distribution exits primarily in its coffee and in-store bakery categories, as well as the restoration of one of its broth facilities.
• Despite the sales decline, THS says it's attractively positioned at an intersection of two powerful long term consumer trends: the growth of private brand groceries and the consumers' shift towards snacking. Further, many grocery retailers also see significant runway for growth in private brands and are making investments.
• For example, THS notes that Walmart recently launched bettergoods, the largest food and beverage private brand in roughly 20 years. Walmart is TreeHouse's largest customer by far at 22.4% of 2023 sales. Other brands making significant investments include Kirkland (Costco) and Simple Truth (Kroger). Also, Aldi continues its store base expansion across the US, with an assortment that is focused almost exclusively on private brands.
• Looking ahead, THS says it made significant progress converting a set of pipeline opportunities in 1H24, which should add to volume growth in 2H24. This includes wins in cookies, refrigerated dough, pretzels and pickles. THS has also been bolstering its supply chain through manufacturing efficiencies, procurement savings and improving the efficiency of its distribution network.
• A headwind in Q1 was THS having to restart its broth business. The downtime impacted Q1 profitability but THS now says it is running the broth production lines and shipping product from this facility today. THS has since upgraded its equipment and improved its processes. This is important because THS will soon be heading into broth season as the weather turns colder. THS believes this restart should expand margins and provide a meaningful lift to profitability in 2H24.

Overall, the stock is holding up fairly well. The results were demonstrably better than Q1, which were partly impacted by the broth production issues. However, it is good to see broth coming back online. The large EPS beat tells us perhaps analysts were expecting that to be more of an issue. We suspect the weakness in the stock is largely from overall market weakness.

Bigger picture, consumers have been seeking out value to deal with inflation, which is good news for private label companies like TreeHouse. The company has been hampered by some operational issues, but they seem to be getting fixed. Also, many grocery retailers are making investments in private label. THS had some wins in 1H24 which should help volumes in 2H24.