Kraft Heinz (KHC) Focuses On Product Innovation, Sales Weak

Owing to the growing awareness of the nutritional value of food products among consumers, The Kraft Heinz Company (NASDAQ:KHC) is focusing on natural and organic ingredients, reshaping its existing portfolio and foraying into other categories. Through 2017, the company has been focusing on improving in many areas, including soy sauces in Indonesia, cold cuts in United States and baby food in Canada.

Also, the importance of using real ingredients and minimal processing in packaged food products is being emphasized on. As a result, a large number of companies in the food industry are switching or have already switched to the use of cage-free eggs. Kraft Heinz, which uses eggs for its line of sauces, plans to switch to 100% cage-free eggs for its North American operations by 2025.

Apart from innovation, cost saving has also led to higher profits. The company expects $1.7 billion to $1.8 billion (previously 1.7 billion) of cumulative Integration Program savings by the end of 2017, primarily focused on work-force reduction, factory closures and consolidations. In third-quarter 2017, the company realized cumulative savings of approximately $1.58 billion from its Integration Program.

Other productivity improvement initiatives include programs such as zero-based budgeting, modernization and capability building within the manufacturing footprint.

Though the company’s sales have been relatively soft, cost savings have led to better margins. While organic sales declined 1.1% in the last nine months of 2017, adjusted EBITDA rose 1.3% and adjusted EBITDA margin expanded 80 basis points year over year. As part of these initiatives, savings are being re-invested in the business for innovation, brand building and marketing to stimulate the top line.

Concerns

The company is seeing top-line weakness over the past several quarters owing to a shift in consumer preference toward natural and organic ingredients. In the first nine months of 2017, reported net sales of $19.36 billion declined 1.4% year over year primarily due to soft consumer demand in the United States, Canada and Europe. Three of the four reporting segments saw year-over-year declines during this period, with Canada seeing the steepest decline of 5.5%. The United States and Europe witnessed a decline of 1.7% and 1.6%, respectively. Organically, sales declined 1.7% in the United States and 6.4% in Canada.

Continued softness in sales weighed on the company’s performance, leading to an 8.9% year-to-date decline in the shares. This compares unfavorably with the industry’s fall of 5.5%. Also, the earnings estimates for 2017 and 2018 remained stable over the past 30 days.

Currency fluctuations are a major headwind for Kraft Heinz, with a considerable percentage of its revenues coming from outside the United States. Foreign exchange dented revenue growth by more than 5% in fiscal 2015 and 2.5% in 2016. It also negatively impacted net sales by 0.3% in the first three quarters of 2017.

Moreover Kraft Heinz’s fourth-quarter outlook is weak with organic sales likely to face a 30-bps headwind from hurricane-related issues, delayed production line start-ups impacting cold cuts as well as difficult year-over-year comparisons owing to strong fourth-quarter 2016 results. The company anticipates solid EBITDA growth to offset these challenges, reflecting its focus on boosting sales as well as cost savings.

Zacks Rank & Stocks to Consider

Kraft Heinz carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the industry are Flowers Foods, Inc. (NYSE:FLO) , The Conagra Brands Inc. (NYSE:CAG) and Lamb Weston Holdings Inc. (NYSE:LW) . All the companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Flowers Foods’ expected earnings growth for 2018 is 5.4%.

Conagra Brands’ earnings are expected to grow 9.1% in fiscal 2018.

Lamb Weston Holdings surpassed earnings in all of the past four quarters, the average beat being 11%.

Wall Street’s Next Amazon (NASDAQ:AMZN)

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>