Kraft Heinz Fights Sales Slump with Cost-Saving Initiatives
On Aug 21, we issued an updated research report on The Kraft Heinz Company KHC, headquartered in Pittsburgh, PA, known for its consumer packaged food and beverages.
Although Kraft Heinz’s shares have performed better than the industry year to date, estimates have been trending downward for 2017 and 2018 over the last 90 days. While the industry witnessed a decline of 6.3%, the company’s lost 3.3% during the same time frame. A shift in consumer preferences toward natural and organic ingredients over packaged and processed food hurt the company’s top line.
Meanwhile, the company has been undertaking several sales driving actions in 2017, like cost saving and productivity gain, in order to deal with the challenging macro environment.
Key Sales Drivers
The company’s outlook for the second half of 2017 is focused on the strategy of investing, innovation, marketing and go-to-market capabilities as it drives savings and efficiencies.
Kraft Heinz has implemented many cost-saving initiatives, including the integration of Kraft Foods and Heinz. The company plans to save $1.7 billion in annual costs by the end of 2017, primarily focused on work-force reductions along with factory closures and consolidations. As of second-quarter 2017, the company realized cumulative savings of approximately $1.45 billion from its Integration Program.
Among the other productivity improvement initiatives, programs such as zero-based budgeting, modernization and capability building within the manufacturing footprint and building a performance driven culture in the company were undertaken.
Though the company’s sales have been relatively soft, cost savings have led to better margins, mainly in the developed markets of the United States and Europe. In the second quarter of fiscal 2017, the company reported an organic net sale decline of nearly 1% while adjusted EBIDTA grew nearly 2%. As part of these initiatives, savings are being re-invested in innovation, brand building and marketing to stimulate top-line growth. The company is also working for whitespace expansion of Kraft and Heinz brands in both food services and international channels.
With growing awareness of the nutritional value of food products and a subsequent shift in consumer preference toward organic product over packaged items, Kraft Heinz, like many other companies in the industry, plans to switch to 100% cage-free eggs for its North American operations by 2025.
In 2017, the Kraft Heinz is focused on improving the performance of three key brands — Heinz, Kraft and Planters — and five global product categories, which are condiments and sauces, cheese, meals, nuts and baby food.
Challenges
However, the company has been seeing top-line weakness over the past several quarters. Kraft Heinz’ categories have slowed down due to soft global retail and consumer demand. Consumption trends in a number of the company’s key categories like ready-to-drink beverages, frozen meals and salad dressings remain challenged.
In the first half of 2017, reported sales of $13.04 billion declined 2.4% year over year due to soft consumer demand in North America and Canada. Three of the four reporting segments registered year-over-year decline during this period, with the steepest decline in Canada (down 8.9%) and Europe (down 5.8%). Its flagship U.S. segment saw a 2.3% year-over-year net sales decline. The company’s overall organic sales also declined 1.8% during the period.
Kraft Heinz’s developed markets – United States and Europe – saw negative organic sales growth. The company is witnessing lower volumes and share losses in the United States due to weak category trends.
Zacks Rank & Stocks to Consider
Kraft Heinz currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in this sector are Post Holdings, Inc. POST, The Chefs' Warehouse, Inc. CHEF and Ingredion Incorporated INGR. While Post Holdings sports a Zacks Rank #1 (Strong Buy), Chefs' Warehouse and Ingredion carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Post Holdings’ current quarter’s expected earnings growth is 41.8%.
Current quarter’s expected earnings growth for Chefs' Warehouse is 50%.
Ingredion Incorporated shows its current quarter expected earnings growth at 3.6%.
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