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TreeHouse Foods (THS) is trading roughly flat after completing its previously announced deal to acquire Harris Tea, a private brand tea manufacturer. TreeHouse, a huge supplier of private label food and beverages, also reaffirmed its FY24 guidance, including the expectation of sequential improvement in volume growth and profit margin in Q4. THS typically reports Q4 results in mid-February.

• Harris Tea was not a large deal with a $205 mln price tag. However, the deal brings aboard another fast-growing, margin-accretive business. It also gives TreeHouse an immediate leadership position in private label tea. The company cited Harris Tea's capabilities in tea sourcing, blending and packing, as well as its scale and customer relationships fitting TreeHouse's strategy well. THS has been focusing its M&A strategy more on higher growth and higher margin targets in recent years and Harris Tea is a good example.
• TreeHouse has been struggling a bit lately. It recently had a voluntary recall of frozen griddle products and it temporarily closed its Ontario facility to conduct a deep cleaning. It expects the facility to resume manufacturing in Q1.
• In addition, the company reported a shortfall in Q3 sales in mid-November. Consumer trends in THS's categories saw a significant deceleration as the quarter progressed. As such, the stock gapped lower in November on the Q3 report as investors were surprised to see THS miss on revs and guide Q4 revs below analyst expectations.
• With consumers focusing more on value, you would think private label would be doing well. THS said that overall private brand industry dynamics remain favorable when compared to historic levels. Also, price gaps are healthy and private brands continue to take share. However, given the lower consumption environment, the share gains are coming from a smaller pie. Another factor is that promotions are still below historic levels seen prior to the pandemic.
• Its organic net sales trend improved in Q3. However, results were impacted by weakening consumer trends across its industry and specifically TreeHouse's categories as Q3 progressed. Also, Hurricane Helene caused some delays in shipping volume out of its North Carolina distribution center. Despite the headwinds, THS reported strong adjusted gross margin due to savings associated with its supply chain initiatives.

Overall, we think Harris Tea will be a nice addition to growth and margins over the long term. In the near term, we were pleased to see THS reaffirming guidance for Q4 following the miss and guide-down last quarter. With that said, we think the focus in the Q4 report will be the Q1 guidance. Hopefully, THS will be able to turn the corner and improve results in 2025.