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Kraft Heinz (KHC) Gains on Solid Demand, Cost Concerns Stay

The Kraft Heinz Company KHC is benefiting from higher consumer demand, stemming from escalated at-home consumption and more cook-at-home amid the coronavirus pandemic. Moreover, the company’s recently-unveiled operating model and robust efficiency building plans look impressive. However, escalated costs and unfavorable currency rates are headwinds.

Let’s delve deeper.

Factors in Favor of Kraft Heinz

Kraft Heinz is benefiting from burgeoning demand amid the coronavirus pandemic which bolstered the company’s second-quarter 2020 results with the top and the bottom line increasing year over year and beating the Zacks Consensus Estimate. Impressed with its strong business momentum, Kraft Heinz expects third-quarter organic net sales growth in mid-single-digit band compared with the year-ago quarter’s levels. Further, management anticipates high-single-digit year-over-year growth in its constant currency adjusted EBITDA during the third quarter. Also, the metric is likely to grow by mid-single-digit for 2020.

Recently, Kraft Heinz laid out an operating model that incorporates five key elements, which includes People with Purpose, Consumer Platforms, Ops Center, Partner Program and Fuel Our Growth. Notably, Ops Center element will enable Kraft Heinz to establish an efficient, fast and integrated supply chain network. Moreover, Partner Program element is designed to create solid customer partnerships and develop new strategic partnerships. Lastly, the Fuel Our Growth strategy is aimed at investing in growth opportunities, solidifying long-term market position as well as staying committed to shareholder returns.


 

To ramp up overall business, Kraft Heinz laid down certain enterprise transformation strategies. In this context, the company is on track to build efficiency across its supply chain, with particular emphasis on procurement, manufacturing and distribution. In third-quarter 2019, management implemented nine transformational projects to strengthen some of the core areas of the business. Among them, five projects were directed toward bolstering the top line, two for enhancing operational efficiencies and the remaining for increasing effectiveness.

In terms of cost savings, the company is increasing visibility and control of its cost components, especially in areas such as marketing and e-commerce. It is also keeping a close watch on investments made for enhancing sales and customer services. Further, Kraft Heinz is on track to examine its SKU’s to remove complexities and boost mix.

Hurdles on the Way

Kraft Heinz is witnessing higher selling, general and administrative expenses. Excluding impairment losses, SG&A expenses (as a percentage of sales) expanded 210 basis points to 13.8% in the second quarter. Apart from this, the company is incurring higher expenses related to the coronavirus pandemic. Moreover, Kraft Heinz’s cross-border presence exposes it to unfavorable currency movements. During the quarter, currency movements had an adverse impact of 1.5 percentage points on the top line.

Nonetheless, the aforementioned growth efforts are likely to help this Zacks Rank #3 (Hold) company tide oversuch hurdles. Notably, the company’s shares have increased 14.6% in the past six months compared with the industry’s growth of 16.6%.

Solid Food Stocks

The Hain Celestial HAIN, with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 15.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

United Natural Foods UNFI, with a Zacks Rank #1, has a trailing four-quarter earnings surprise of 4.8%, on average.

General Mills GIS, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7.5%.

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