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Kraft Heinz (KHC) Cuts Sales View In Spite of Q2 Earnings Beat

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The Kraft Heinz Company (KHC - Free Report) posted second-quarter 2024 results, with the top and the bottom line declining year over year. Quarterly earnings beat the Zacks Consensus Estimate, while net sales missed the same.

KHC's net sales growth fell short of management’s expectations due to continued cautious consumer sentiment. While the company anticipates a more gradual pace of top-line improvement in the latter half of the year, it is on track with investing in brands and enhancing performance.

Management lowered its 2024 organic net sales and adjusted operating income outlook while reaffirming its adjusted earnings per share (EPS) view.

Kraft Heinz Company Price, Consensus and EPS Surprise

 

Kraft Heinz Company Price, Consensus and EPS Surprise

Kraft Heinz Company price-consensus-eps-surprise-chart | Kraft Heinz Company Quote

 

Quarter in Detail

Kraft Heinz posted adjusted earnings of 78 cents per share, beating the Zacks Consensus Estimate of 73 cents. However, quarterly earnings dropped 1.3% year over year, mainly due to the lapping of a one-time tax benefit that was recognized in the prior year. Increased adjusted operating income, reduced shares outstanding and positive changes in other expenses/(income) offered some respite.

The company generated net sales of $6,476 million, down 3.6% year over year. Net sales included an unfavorable currency impact of 1 percentage point and an adverse impact of 0.2 percentage points from divestitures. Net sales missed the Zacks Consensus Estimate of $6,536.5 million. Organic net sales fell 2.4% year over year.

Pricing inched up 1 percentage point year over year. The upside was driven by increases in the North America and Emerging Markets segments, although this was somewhat countered by lower prices in International Developed Markets. The favorable pricing was mainly a result of adjustments in certain categories to address higher input costs. Volume/mix dropped 3.4 percentage points from the prior year’s levels, with declines in North America and International Developed Markets, partially balanced by growth in Emerging Markets. The negative impact on volume/mix was largely due to weakening consumer sentiment. Our model suggested pricing to be up 2.6% and volumes to decline 2.8% in the second quarter.

The adjusted gross profit of $2,296 million increased from the $2,239 million reported in the year-ago quarter. The adjusted gross margin expanded 210 basis points (bps) to 35.5%. We had expected an adjusted gross margin expansion of 100 bps to 34.3%.

Adjusted operating income moved up 2% to $1,380 million. The upside can be attributed to gross savings from reduced commodity and logistics costs and higher pricing. These gains outweighed the negative effects of unfavorable volume/mix, higher selling, general and administrative expenses — largely due to investments in marketing and technology — and adverse impacts from foreign currency fluctuations.

Segment Discussion

North America: Net sales of $4,921 million declined 3.1% year over year. Organic sales fell 2.9%. During the quarter, pricing moved up 1.3 percentage points, but the volume/mix fell 4.2 percentage points.

International Developed Markets: Net sales of $885 million were down 5% year over year. Organic sales declined by 3.9%, with pricing slumping 1.5 percentage points and volume/mix accounting for a drop of 2.4 percentage points.

Emerging Markets: Net sales of $670 million were down 5.7% year over year. Organic sales rose 3.4%, with pricing up 1.9 percentage points and volume/mix increase of 1.5 percentage points.

Other Financial Aspects

Kraft Heinz ended the quarter with cash and cash equivalents of $900 million, long-term debt of $19,265 million and total shareholders’ equity of $48,895 million. Net cash provided by operating activities was $1,713 million for six months ended Jun 29, 2024, and free cash flow amounted to $1,170 million.

During this period, Kraft Heinz paid cash dividends worth $969 million and made share buybacks worth $537 million. As of Jun 29, 2024, the company had shares worth $2.4 billion remaining under its buyback plan.

In a separate press release, Kraft Heinz declared a quarterly dividend of 40 cents per share, payable on Sep 27, 2024, to shareholders of record as of Aug 30.

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Guidance

For 2024, organic net sales are now expected to decline by 2% to remain flat compared to the previous year, revised from the earlier forecast of 0-2% growth.

The adjusted operating income is now projected to increase 1-3% year over year, down from the earlier forecast of 2-4 percent growth. This forecast includes an anticipated expansion in adjusted gross profit margin of 75 to 125 bps, compared to the previous expectation of 50-100 bps growth.

The adjusted EPS for 2024 is still envisioned to grow 1-3% to the band of $3.01-$3.07. The adjusted effective tax rate is anticipated to be 20-22%. The company also anticipates an adverse effect of around $30 million in interest expenses and other income or expenses compared with the previous year’s figure. Management does not expect to make any additional share buybacks in 2024.

Shares of this Zacks Rank #4 (Sell) company have dropped 12.4% in the past three months compared with the industry’s decline of 4.1%.

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