Kraft Heinz (KHC) Q3 Earnings: Weak U.S Segment a Worry

The Kraft Heinz CompanyKHC is slated to release third-quarter 2018 results on Nov 1, after market close. This renowned food and beverages company has a mixed record of earnings surprises in the trailing four quarters. Let's see how things are placed ahead of the upcoming quarterly results.

Sluggish U.S. and Canadian Segments

Sales in the U.S. segment have been declining for more than a year, with lower cheese shipments being persistent headwind in many quarters. Sales in the region dipped close to 2% year over year in the last reported quarter, due to reduced volume/mix stemming from lower shipments of nuts, frozen items and cheese. Well, Kraft Heinz, like many other U.S. food producers, has struggled due to the shift in consumers' preference toward natural and organic ingredients over packaged and processed food. We note that the U.S. accounts for a major proportion of Kraft Heinz revenues. Hence, any sluggishness in the performance of this segment is most likely to affect the company's top line in the third quarter.

In fact, Kraft Heinz has been witnessing soft sales in Canada as well. Sales in this region have been falling year over year for two straight quarters now. During the second quarter, the performance was sluggish due to the absence of promotional activities, adverse trade inventory adjustments and product discontinuations. Near-term hurdles in the region are expected to linger in the third quarter.

Persistence of the aforementioned headwinds are most likely to impact the Kraft Heinz's top line in the third quarter. The Zacks Consensus Estimate for sales in the U.S. and Canada segments are currently pegged at $4,358 million and $526 million respectively, reflecting declines from $4,380 million and $559 million delivered in the year-ago quarter. The Zacks Consensus Estimates for net sales is pegged at $6,309 million, depicting a fall of roughly 0.08% from $6,314 million in the prior-year quarter.

The Kraft Heinz Company Price, Consensus and EPS Surprise

The Kraft Heinz Company Price, Consensus and EPS Surprise | The Kraft Heinz Company Quote

High Costs Likely to Dent Profitability

Escalated input costs have been weighing upon Kraft Heinz's performance. In fact, high freight and resin expenses along with costs related to the company's aggressive commercial investment agenda and unfavorable volume/mix dragged down the company's adjusted EBITDA during the second quarter. Incidentally, third-quarter adjusted EBITDA is expected to decline at a greater rate compared with the decline in the first half of 2018. Management expects cost inflation, mainly freight, to put pressure on EBITDA.

Apart from Kraft Heinz, other food companies like United Natural Foods UNFI , McCormick & Company MKC and Conagra Brands CAG have also been grappling with higher freight and transportation costs. Coming back to Kraft Heinz, the company is also exposed to tariff related risks, which are affecting foil and aluminum expenses in the United States.

Well, such aspects are likely to drag the company's profits in the upcoming earnings release. Notably, the consensus mark for third-quarter earnings is currently pegged at 81 cents, depicting a fall of 2.4% from 83 cents in the year-ago quarter. The figure has declined by a penny in the past 30 days.

Will Strategic Growth Efforts Aid Results?

Kraft Heinz is on track with several initiatives to drive savings and optimize operations. These include efforts such as zero-based budgeting, modernization as well as capability building within the manufacturing footprint and building a performance driven culture in the company. Apart from focusing on building profitability, gains from such initiatives are being re-invested in the business for innovation, brand building and marketing.

Speaking of brand building, the company is focused on improving many areas including Indonesia soy sauces, U.S. cold cuts, baby food in Canada and its non-measured channel shares in the U.K. Further, the company has various innovation initiatives planned in the foodservice space to fuel additional growth across all regions. Also, the company is making innovation efforts in the e-commerce channel, which witnessed more than 75% growth in the second quarter in the United States.

All said let's take a look at the Zacks Model for the upcoming quarterly release.

What the Zacks Model Unveils

Our proven model shows that Kraft Heinz is likely to beat bottom-line estimates in the upcoming quarterly release. For this to happen, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Kraft Heinz's Earnings ESP of +1.86% combined with a Zacks Rank #3 makes us reasonably confident regarding an earnings beat.

You can see the complete list of today's Zacks #1 Rank stocks here .

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United Natural Foods, Inc. (UNFI): Free Stock Analysis Report

McCormick & Company, Incorporated (MKC): Free Stock Analysis Report

Conagra Brands Inc. (CAG): Free Stock Analysis Report

The Kraft Heinz Company (KHC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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