Why Is Kraft (KHC) Down 13.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Kraft Heinz (NASDAQ:KHC). Shares have lost about 13.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Kraft due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Kraft Heinz Q4 Earnings Surpass Estimates, Sales Lag

Kraft Heinz reported fourth-quarter 2019 results. Adjusted earnings per share of 72 cents surpassed the consensus mark of 68 cents. However, the bottom line declined 14.3% year over year.

Net sales declined 5.1% year over year to $6,536 million. Also, the figure lagged the Zacks Consensus Estimate of $6,579 million. Net sales growth included 0.6% and 2.3% unfavorable impacts of currency and divestitures, respectively. Organic sales dipped 2.2%.

Pricing was up 2%, driven by price improvements in the United States, Rest of World and EMEA markets. Volume/mix fell 4.2% due to lower volumes in the United States. Also, volumes in Rest of World segment were down to some extent.

Gross profit of $2,107 million declined 4.9% year over year and gross margin came in at 32.2% in the reported quarter. Adjusted EBITDA was down 6.6% to $1,564 million in the quarter due to higher supply chain expenses in Rest of World segment along with lower prices in Canada unit. Also, rise in general corporate costs were a drag.
Segment Discussion

Segment Information

United States: Net sales of $4,682 million declined 2.7% year over year. During the quarter, pricing improved 3.1% owing to better prices in certain categories and favorable impact of promotional activities. Volume/mix fell 5.8% due to lower distribution in cold cuts and frozen categories along with reduced shipments in a few categories. However, consumption growth in condiments, sauces and foodservice provided some cushion.

The segment’s adjusted EBITDA inched up1.6% to $1,270 million, driven by higher prices, reduced logistic costs and lower compensation expenses. These factors more than offset the adverse impacts from volume/mix, key commodity cost inflation and increased manufacturing expenses.

Canada: Net sales of $457 million declined 23.8% year over year, which included unfavorable impact of divestitures to the tune of 21.4% and a favourable currency impact of 0.1% .Organic sales fell 2.5% year over year. Pricing dipped 5% due to increased promotional activities and higher trade expense. Volume/mix moved up 2.5% owing to growth in products such as peanut butter and pasta sauce. However, weakness in coffee and reduced cheese shipment acted as deterrents. Segment adjusted EBITDA declined 26.1% to $116 million due to unfavorable pricing and higher procurement costs.

EMEA: Net sales of $689 million declined 0.5% year over year, with a 0.8% unfavorable impact of currency. Organic sales inched up 0.3% year on year. Volume/mix was up 0.2% on growth in food services across most regions as well as condiments and sauces in Russia. However, persistent softness in infant nutrition and lower promotional activities remained a drag. Moreover, pricing grew slightly owing to better pricing in the U.K. Adjusted EBITDA increased 6.3% to $182 million on higher organic net Sales and lower compensation expenses. It also reflects 1.4% loss from unfavorable currency.

Rest of World (comprising Latin America and APAC): Net sales of $708 million declined 10.1%, with a 5.2% adverse impact of currency and a 3.3% negative impact of sale of an Indian nutritional beverage. Organic sales declined 1.6%. Pricing was up 0.7%, especially in Latin America and China. Volume/mix declined 2.3% due to reduced shipments across various categories in Australia and New Zealand along with lower shipments in Latin American. Adjusted EBITDA dropped 53.9% to $60 milliondueto weak lower volume/mix and escalated supply-chain costs.

Financials

Kraft Heinz ended the quarter with cash and cash equivalents of $2,279 million, long-term debt of $28,216 million, and total shareholders’ equity of $51,623 million.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -15.88% due to these changes.

VGM Scores

At this time, Kraft has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kraft has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.