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Is Kraft Heinz Stock Set for Success Amid a Weak Consumer Market?
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The Kraft Heinz Company (KHC - Free Report) successfully implemented pricing strategies that have strengthened its performance and helped maintain robust profit margins despite ongoing inflationary pressures. The company continues to excel in its three key segments — Foodservice, Emerging Markets and U.S. Retail Grow platforms — despite challenges in the consumer environment. KHC is actively working on transforming its business to unlock its full potential and boost shareholder value.
Let’s delve deeper.
Positive Performance Boosts Kraft Heinz’s Margins
One of the key reasons for Kraft Heinz's resilience is its focus on effective pricing strategies. The company successfully managed to keep its second-quarter 2024 adjusted gross profit at $2,296 million, up from $2,239 million in the same quarter last year. It improved its quarterly adjusted gross margin by 210 basis points (bps) to 35.5%. This impressive performance reflects the success of pricing adjustments aimed at offsetting rising input costs. KHC’s adjusted operating income moved up 2% to $1,380 million in the second quarter, highlighting the benefits of reduced commodity and logistics expenses.
Transformation Drives KHC’s Future Growth
Kraft Heinz's three key segments also remain strong. The ACCELERATE platforms in North America, for example, are expected to register a robust annual growth rate of 4% over the next decade. Brands like Heinz and Ore-Ida are experiencing positive momentum, thanks to strategic investments and innovation. In Emerging Markets, while there were setbacks in countries like China and Brazil, the company still reported high single-digit growth in the second quarter.
The company is actively pursuing a transformation strategy aimed at unlocking its full potential. Since launching Agile@Scale in February 2022, it concentrated on enhancing its agility through partnerships with technology firms and innovative solutions. This approach resulted in a 190-bps increase in adjusted gross profit margin in the first half of 2024.
The AGILE@SCALE initiative is being expanded globally, introducing North American solutions to international markets. KHC is also ramping up its innovation efforts, significantly increasing its research and development investments. This commitment is evident in its innovation pipeline, which contributed 2.4% to organic net sales year to date. As consumer preferences shift toward wellness and plant-based products, the company is well-positioned to leverage its strong brand portfolio to meet these demands.
Image Source: Zacks Investment Research
Kraft Heinz Facing Consumer Challenges
Despite these positive developments, Kraft Heinz is not without its challenges. The current consumer environment is marked by slower income growth and persistent inflation, which have dampened consumer sentiment. This has led to a decline in second-quarter organic net sales by 2.4% year over year, largely due to lower demand and disappointing sales for products like Lunchables.
In North America, the company saw a 2.9% decline in organic net sales, influenced by increased value-seeking behavior among consumers. Internationally, developed markets experienced a 3.9% drop in sales, exacerbated by lower prices in the U.K. and challenges in customer negotiations. Considering these factors, Kraft Heinz revised its expectations for organic net sales in 2024, suggesting a decline of 2% to flat growth. This marks a shift from earlier forecasts of growth.
Volume Declines and Currency Fluctuations Hurt KHC
Kraft Heinz has also been struggling with weak volume performance over recent quarters. The company reported a 3.4 percentage point decline in volume/mix in the second quarter, particularly in North America and developed markets. This downward trend raises concerns about the company’s ability to sustain overall profitability moving forward.
Its extensive international operations expose it to risks from adverse currency fluctuations. In the second quarter, unfavorable exchange rates negatively impacted net sales by 1 percentage point. Such volatility continues to be a significant concern, potentially affecting Kraft Heinz’s revenues and overall financial health.
Final Thoughts on Kraft Heinz
In conclusion, Kraft Heinz is at a crossroads. On one hand, it demonstrates solid pricing strategies and robust brand performance, which are vital for maintaining margins. It faces significant challenges, including declining consumer demand and operational difficulties. Given the mixed signals from both positive performance indicators and ongoing struggles, investors should monitor how Kraft Heinz navigates its challenges and capitalizes on growth opportunities in the coming quarters. The company currently carries a Zacks Rank #3 (Hold).
KHC’s stock has increased 7.2% in the past three months compared with the industry’s 8.7% growth.
Better-Ranked Staple Stocks
Here, we have highlighted three better-ranked food stocks, namely, The Chef's Warehouse (CHEF - Free Report) , Flowers Foods (FLO - Free Report) and McCormick & Company, Inc. (MKC - Free Report) .
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2 (Buy). FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings each implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.
McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.
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Is Kraft Heinz Stock Set for Success Amid a Weak Consumer Market?
The Kraft Heinz Company (KHC - Free Report) successfully implemented pricing strategies that have strengthened its performance and helped maintain robust profit margins despite ongoing inflationary pressures. The company continues to excel in its three key segments — Foodservice, Emerging Markets and U.S. Retail Grow platforms — despite challenges in the consumer environment. KHC is actively working on transforming its business to unlock its full potential and boost shareholder value.
Let’s delve deeper.
Positive Performance Boosts Kraft Heinz’s Margins
One of the key reasons for Kraft Heinz's resilience is its focus on effective pricing strategies. The company successfully managed to keep its second-quarter 2024 adjusted gross profit at $2,296 million, up from $2,239 million in the same quarter last year. It improved its quarterly adjusted gross margin by 210 basis points (bps) to 35.5%. This impressive performance reflects the success of pricing adjustments aimed at offsetting rising input costs. KHC’s adjusted operating income moved up 2% to $1,380 million in the second quarter, highlighting the benefits of reduced commodity and logistics expenses.
Transformation Drives KHC’s Future Growth
Kraft Heinz's three key segments also remain strong. The ACCELERATE platforms in North America, for example, are expected to register a robust annual growth rate of 4% over the next decade. Brands like Heinz and Ore-Ida are experiencing positive momentum, thanks to strategic investments and innovation. In Emerging Markets, while there were setbacks in countries like China and Brazil, the company still reported high single-digit growth in the second quarter.
The company is actively pursuing a transformation strategy aimed at unlocking its full potential. Since launching Agile@Scale in February 2022, it concentrated on enhancing its agility through partnerships with technology firms and innovative solutions. This approach resulted in a 190-bps increase in adjusted gross profit margin in the first half of 2024.
The AGILE@SCALE initiative is being expanded globally, introducing North American solutions to international markets. KHC is also ramping up its innovation efforts, significantly increasing its research and development investments. This commitment is evident in its innovation pipeline, which contributed 2.4% to organic net sales year to date. As consumer preferences shift toward wellness and plant-based products, the company is well-positioned to leverage its strong brand portfolio to meet these demands.
Image Source: Zacks Investment Research
Kraft Heinz Facing Consumer Challenges
Despite these positive developments, Kraft Heinz is not without its challenges. The current consumer environment is marked by slower income growth and persistent inflation, which have dampened consumer sentiment. This has led to a decline in second-quarter organic net sales by 2.4% year over year, largely due to lower demand and disappointing sales for products like Lunchables.
In North America, the company saw a 2.9% decline in organic net sales, influenced by increased value-seeking behavior among consumers. Internationally, developed markets experienced a 3.9% drop in sales, exacerbated by lower prices in the U.K. and challenges in customer negotiations. Considering these factors, Kraft Heinz revised its expectations for organic net sales in 2024, suggesting a decline of 2% to flat growth. This marks a shift from earlier forecasts of growth.
Volume Declines and Currency Fluctuations Hurt KHC
Kraft Heinz has also been struggling with weak volume performance over recent quarters. The company reported a 3.4 percentage point decline in volume/mix in the second quarter, particularly in North America and developed markets. This downward trend raises concerns about the company’s ability to sustain overall profitability moving forward.
Its extensive international operations expose it to risks from adverse currency fluctuations. In the second quarter, unfavorable exchange rates negatively impacted net sales by 1 percentage point. Such volatility continues to be a significant concern, potentially affecting Kraft Heinz’s revenues and overall financial health.
Final Thoughts on Kraft Heinz
In conclusion, Kraft Heinz is at a crossroads. On one hand, it demonstrates solid pricing strategies and robust brand performance, which are vital for maintaining margins. It faces significant challenges, including declining consumer demand and operational difficulties. Given the mixed signals from both positive performance indicators and ongoing struggles, investors should monitor how Kraft Heinz navigates its challenges and capitalizes on growth opportunities in the coming quarters. The company currently carries a Zacks Rank #3 (Hold).
KHC’s stock has increased 7.2% in the past three months compared with the industry’s 8.7% growth.
Better-Ranked Staple Stocks
Here, we have highlighted three better-ranked food stocks, namely, The Chef's Warehouse (CHEF - Free Report) , Flowers Foods (FLO - Free Report) and McCormick & Company, Inc. (MKC - Free Report) .
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2 (Buy). FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings each implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.
McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.