On Apr 8, 2014, we issued an updated research report on Mondelez International, Inc. (MDLZ).
Mondelez’s fourth quarter was worse than the third as it missed the Zacks Consensus Estimate for both earnings and revenues due to challenges faced by the snack category and slowdown in the emerging markets.
The global snack powerhouse has been reporting disappointing top-line results ever since it separated from Kraft Foods Group, Inc. (KRFT). Weak biscuit sales in China, continued headwinds from coffee pricing and slower global category growth hurt revenues in the second half of 2013.
Though the company expects to do better in 2014, the first quarter is expected to be tough as most of the headwinds that hurt results in the second half 2013 are expected to persist. Continued biscuit weakness in China, lower coffee pricing and shift in Easter timing to the second quarter are expected to hurt first-quarter sales. In fact, uncertain conditions in emerging markets, low coffee pricing, gum weakness and tepid growth in developed markets are clouding top-line visibility in 2014.
However, though sales have been slower, Mondelez has been focusing on expanding margins through cost savings and productivity improvement.
Mondelez is taking some major steps to improve margins, cash flow and return on invested capital. The company is building an integrated supply chain organization while simultaneously restructuring its supply chain network and driving productivity improvement through Lean Six Sigma, procurement transformation and simplification. These efforts are expected to deliver $3 billion in gross productivity savings, $1.5 billion in net productivity and $1 billion in incremental cash over the next three years.
Supply chain/productivity savings, improved product mix and overhead leverage are expected to help the company achieve 60–90 bps of annual operating margin improvement over the next three years. Mondelez is primarily focusing on expanding operating margins in North America and Europe by 500 bps and 250 bps, respectively, by 2016. These margin improvements are expected to fund growth in the emerging markets.
We are, thus, encouraged by this Zacks Rank #3 (Hold) company’sstrong portfolio of iconic brands, potential for margin expansion and commanding presence in the fast growing emerging markets.
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