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Kraft Heinz Down 13% in 3 Months, Rising Costs a Deterrent

Zacks Equity Research

The Kraft Heinz Company KHC is sailing on rough seas, thanks to headwinds like adverse currency movements, lower organic sales and rising costs. These headwinds have marred the company’s performance in the first half of 2019.

Well, such downturns have made investors lose optimism in the stock. This Zacks Rank #4 (Sell) company’s shares have lost 13.3% in the past three months against the industry’s rise of 1.1%.

Let’s take a closer look at the factors plaguing the company and discuss efforts undertaken to overcome the same.     

Factors Hurting the Stock

Rising costs have been a headwind for the company for a while. During the first half of fiscal 2019, higher cost scenario was triggered by increased fixed and supply-chain costs. Inflationary trends were mainly witnessed for packaging, manufacturing and logistics in the United States. Management expects such cost-related pressures in the United States to persist in the forthcoming periods. Other food companies such as Conagra Brands CAG, Sysco Corporation SYY and United Natural Foods UNFI are also grappling with higher expenses.

Coming back to Kraft Heinz, another factor ailing the company is unfavorable currency movements. During first-half 2019, adverse currency fluctuations put pressure on the top line by almost 2.6 percentage points. Adjusted EBITDA was hurt by currency fluctuations to the tune of almost 3.3 percentage points. Sales from Canada reflected a 4-percentage point negative impact from unfavorable currency rates, while EMEA and ROW mirrored impacts of 6.1 and 12.7 percentage points, respectively.

In addition to these, the company’s first-half performance was affected by actions undertaken by retail partners in the United States and Canada for reducing the amount of inventory carried. This marred organic sales in the said period, which weighed upon adjusted EBITDA. Going ahead, management is cautious about continued reductions in inventory levels.

Clearly, Kraft Heinz might continue getting tarnished if the aforementioned headwinds persist in the forthcoming periods.  Nevertheless, this well-known packaged food products company is undertaking pricing initiatives to cushion the pressure from high costs. Additionally, it is on track with investments in marketing, go-to-market capabilities and product development. We expect such efforts to help the company regain lost sheen.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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