Recent second quarter results from Kraft Heinz (KHC, Financial) showed that the company continues to deliver minimal top-line growth. Revenue increased by 0.7% to $6.7 billion versus the same quarter of the previous year. Organic sales declined by 0.4%, although this was an improvement on the previous quarter’s 1.5% fall. Revenue in its core U.S. segment was down 1.9% against a 3.3% drop in the prior quarter, with Canada recording an 8% fall in sales.
Earnings were hit by non-recurring charges such as a $265 million impairment loss. On an adjusted basis, Ebitda was down 4.4%, while reported net income moved 34.8% lower to $756 million. Despite this, the company is targeting profit growth by the fourth quarter of the current fiscal year. Following this, further bottom-line growth is anticipated in the 2019 fiscal year.
Changing strategy
Since reporting its second quarter results the Kraft Heinz stock price is unchanged. Over the last year it is down 30%, which is disappointing compared to the S&P 500’s gain of 15% during the same time period.
Kraft Heinz is a changing business. It is seeking to become increasingly innovative, and this could act as a catalyst on its stock price. The company is seeking to reinvest in its main brands such as Kraft, Heinz, Philadelphia and Oscar Mayer in order to make them more relevant at a time when consumer tastes are changing rapidly. For example, it is removing non-natural ingredients from a range of products. It is also seeking to develop new products through a horizontal brand strategy. One example of this is the launch of Heinz Mayonnaise, which uses simple ingredients and cage-free eggs.
The business is also seeking to innovate through the development of new products. New brands may take time to have an impact on sales and profitability. But at a time when consumers are seeking fresh brands with an authentic backstory, new brands could provide incremental sales to more than offset the top-line growth challenges of recent quarters. For example, the Devour range of frozen meals has helped the company’s frozen food category to return to growth after reporting declines for a number of years.
Renewed optimism
Kraft Heinz’s financial performance has the potential to be catalyzed through a revamped marketing strategy. It is aiming to develop closer relationships with retailers and its customers through an increasing investment in its salespeople. It is seeking to have greater control over its brand message, and believes that focusing on its in-house capabilities could allow it to do so.
Alongside this, it is investing in data-driven marketing. It is seeking to build a rising number of native impressions, in terms of being a part of the conversations of consumer’s everyday lives. One example of delivering greater native impressions is the recent U.S. Heinz Mayochup campaign. According to the company, it generated more native PR impressions for the company than in the whole of the 2017 fiscal year. Combined with higher spending on big brand launches such as the recent Just Crack an Egg campaign, a revitalized marketing campaign could help the company to drive further category and brand growth.
Changing industry
One area of concern for Kraft Heinz is the fragility of its major brands. Consumers' tastes are changing, and this is putting pressure on brands that have enjoyed many years of relatively consistent growth. Disruption is coming from above, with some consumers switching to higher-priced goods that are often fresher and offer cleaner ingredients lists. Established brands are also experiencing a drop in demand from consumers seeking lower-priced private-label alternatives. Retailers such as Costco have released a range of their own products, which are competing successfully with long-established brands in a range of product areas.
In response, Kraft Heinz is seeking to invest in authentic business propositions in a variety of areas, such as Natural & Organic and Health & Performance, through its Springboard program. It intends to provide accepted applications with a 16-week course, where winners will receive financial support and guidance on fundraising from the company. This could help it to unearth the next big brands, which could lead to incremental sales growth. While this strategy may take time to have an impact on its financial performance, it may provide a catalyst over the long term in what is a rapidly changing marketplace.
Verdict
The top- and bottom-line performance of Kraft Heinz has disappointed in recent quarters. Although the second quarter showed a slowdown in organic sales decline, it may take time for the company to deliver a successful turnaround. Investment in new brands and the repositioning of existing brands could act as a catalyst on its performance. New marketing strategies may also have a positive impact on its financial outlook.
Having underperformed the S&P 500 in the last year, the near-term prospects for the stock appear to be uncertain. In the long run, though, it could offer a value investing opportunity as it successfully adapts to changing consumer tastes.
