TreeHouse Foods Delivering Results to Investors
Investors in TreeHouse Foods, a manufacturer of private label foods for grocers (15% of sales are to Wal-Mart), had plenty to be happy about when the company reported its full year results. Despite extreme input price inflation and volatility, 2008 operating earnings per share increased almost 23%, due largely to the acquisition of E.D. Smith. Management is upbeat – expecting unit sales growth and expanded distribution to more than offset price pressure and inventory reductions at retailers, resulting in positive net sales growth in 2009. In addition, productivity gains should improve gross profit margins and drive double-digit earnings growth.
We took a closer look at TreeHouse Foods’ accomplishments since being spun out of Dean Foods in 2005. Since then, THS stock (down 13% since the spin-off) has outperformed the S&P 5
00 (down 42%). Notably, the shares were up about 12% in 2008, compared to a decline in the S&P 500 of nearly 40%. The operating results provide some insight into this superior share price performance. Over the past 3 years, THS has expended about $580 million acquiring Del Monte’s private label soup and infant feeding business and E.D. Smith’s jams and pie filling products which, combined with organic growth, drove annual double-digit growth in sales and operating income. In addition, management kept inventory and receivables turning and improved return on invested capital from 8% in 2006 to almost 10% last year. So what's next? Well, THS started 2009 with a stronger balance sheet than the beginning of 2008 thanks to management's prudent decision to reduce debt last year (read about CPG stock performance and debt in our January 2009 letter). In addition, the company has almost $220 million available on its credit line, which can be used to make acquisitions. With the demand for private label products surging, THS seems poised for a solid 2009. (Company reports)
Another Down Day in the Stock Market, Another Tuna Casserole for Dinner
Have you noticed an eerie coincidence that on days when the stock market decline makes headlines you find yourself having tuna noodle casserole for dinner? According to Google search data, over the past year searches for tuna noodle casserole spiked on days the stock market had large drops in value.
Consumers are preparing casseroles three to five times a week, and seven of the ten most popular recipes on its cooking site are casseroles, according to Campbell Soup. Consumers are getting a nudge from the company as it has ramped up ad spending for TV spots to promote its web site, which features recipes with condensed soup and has increased online marketing. Web traffic on the site has been growing about 50% per month for the last six months.(Advertising Age)
“Lipstick Index” Up at L’Oreal
L’Oreal recently reported a decline in 4Q08 sales, particularly in luxury products which were down 6%, but noted that mass-market products such as lipsticks were holding up well. Lipstick sales were up 11% after 9/11 and more than 20% during the Great Depression. Coined by Leonard Lauder, chairman of Estee Lauder, during the 2001 recession, the lipstick index demonstrates how women tend to forego more expensive luxuries during tough times, but increase less expensive purchases. In addition to higher lipstick sales, its consumer products division continued to show growth in the quarter, despite weakness in department stores and salons in North America. We can’t help but notice that the share price decline of more than 50% since the end of 2007 seems to contradict the solid financial performance of the company in a difficult global economy. L’Oreal’s business was very profitable in 2008, with gross margin exceeding 70% of sales. In addition, the company generated significantly more cash than needed to run the business, which enabled it to pay dividends, buy back stock, and pay down debt in 2008.(Company reports)
Smokers Quit For Cash
Industry Blogger Slams Pepsi’s Logo Redesign
The full article can be found here, but the juiciest part is logo designer, Arnell Group, trying to justify its $1 million design fee with marketing-babble of Olympic proportions:
“The vocabulary of truth and simplicity is a reoccurring phenomena in the brand’s history. It communicates the brand in a timeless manner and with an expression of clarity. Pepsi BREATHTAKING builds on this knowledge. True innovation always begins by investigating the historic path. Going back-to-the-roots moves the brand forward as it changes the trajectory of the future.”
Huh? Why can’t you just say that it tastes good? (BNET)
Door-to-Door Affordable Comfort From Winona, Minnesota
More evidence that affordable comfort is in vogue, Watkins, Inc. of Winona, MN is experiencing its best results in 20 years, and expects double-digit sales growth in 2009 and beyond. The 140 year old company sells 300 products in three core lines – natural personal care, natural home care, and natural and organic herbs, spices, and extracts. Watkins sells its products the old fashioned way, door-to-door via 25,000 direct sales associates, like its founder J.R. Watkins sold his Original Liniment via a horse and buggy in 1868. But in addition, the company’s retail push that began with Wal-Mart in 2004 has been successful, and has now expanded to Target, Walgreen and other mass retailers. Look for more affordable comfort products priced below $10 to be rolled out this year.
(Minneapolis Star Tribune and company website.)
Sadly, elevator music icon Muzak Holdings filed for Chapter 11 bankruptcy protection last month. Perhaps best known for piping vocal-free versions of Stairway to Heaven that even your mom would listen to into elevators and doctors' offices, did you know there was a dark side to those well-planned play lists? Muzak marketed their product with a theory called "stimulus progression," which claimed that a person's outlook could be altered by music. The intent was to gradually increase the tempo of the music over a 15 minute period in order to get happier, more productive office employees. Not surprisingly, it has been reported that rocker Ted Nugent tried to buy the company in the 1980s just so he could shut it down. Now with an estimated $375 million in debt, Muzak Holdings is trying to avoid being Another One that Bites the Dust. (Company reports)
Mall to Invoke Manilow to Drive Out Unruly Teens
You can’t make this stuff up. The city of Christchurch in New Zealand hopes that by pumping Barry Manilow music through the loudspeakers at its central shopping district it will ward off troublesome teens. Some of the teens purportedly are responsible for graffiti, crude behavior and scaring away shoppers. Hmm…maybe I could get my kids to clean their rooms by threatening to play Manilow. (Associated Press)
Quote of the Day: “I think people are stressed out about the economy and just want to go out and shoot something” -Lee Lightsey, Outwest Farms, Wall Street Journal. The FBI reported that in the week of the presidential election, requests for background checks on gun purchases surged nearly 49 percent (GJ Sentinel). Ammunition sales are surging - Wal-Mart supplier Olin Corporation (Winchester) saw 4Q sales increase 17%. (Company reports)
Joe Chumbler, CFA
Fayetteville (479) 251-8400
Rogers (479) 366-4474
Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Wal-Mart Stores, Inc. at the time of this newsletter.
