Will Cost Cuts Boost Kraft Heinz's (KHC) Earnings in Q4?

The Kraft Heinz CompanyKHC will report fourth-quarter 2017 results before market opens on Friday, Feb 16, 2018.

Last quarter, this packaged food manufacturer's earrings met the Zacks Consensus Estimate. Overall, the company surpassed/met the consensus mark in three of the last four quarters, the average positive surprise being 1.38%.

A Look at Kraft Heinz's Revenues Performance & Expectations

The company is seeing top-line weakness over the past several quarters. Soft spending by U.S. shoppers along with rapid changes in consumer preferences and behavior are hurting its categories. In fact, the food industry, which includes legacy brands like General Mills Inc. GIS , Mondelez International, Inc. MDLZ and The Kellogg Company K have been giving dismal performance for quite some time.

In the first nine months of 2017, reported net sales of $19.36 billion declined 1.4% year over year primarily due to soft consumer demand in the United States, Canada and Europe. Three of the four reporting segments registered year-over-year decline during this period, with the biggest decline in Canada (down 5.5%). United States and Europe registered a decline of 1.7% and 1.6%, respectively. Organically, sales declined 1.7% in the United States and 6.4% in Canada.

Its flagship United States segment, accounting for more than 70% of its total net sales, needs sustained improvement in sales for the company's return to an overall healthy stature. Meanwhile, Kraft Heinz expects organic sales growth in the United States to see a 30-basis point headwind from hurricane-related consumer pantry loading in Q3; delayed production line start-ups impacting cold cuts; as well as difficult year-over-year comparison owing to strong fourth-quarter 2016 results that included some degree of retail inventory build. The Zacks Consensus Estimate for the segment's revenues of $4.8 billion reflects 1% decline from the year-ago quarter.

Rest of World (Asia Pacific, Latin America and India, the Middle East and Africa) segment revenues of $850 million are likely to witness 6.1% growth. On the other hand, consensus estimate for Europe segment revenues of $644 million indicates an increase from $600 million a year ago. Canada revenues are likely to increase to $631 million from $617 million a year ago, per the consensus estimate.

Overall, for the fourth quarter, the Zacks Consensus Estimate for Kraft Heinz's total revenues stands at $6.9 billion, implying a 0.6% year-over-year increase.

Bottom-Line Expectation

To combat weak sales environment, Kraft Heinz has implemented several cost-saving initiatives. The company had earlier aimed to cut annual costs by $1.7 billion by 2017-end, primarily through work-force reduction along with factory closures and consolidations. Cost savings have driven margins for the company, mainly in the developed markets of the United States and Europe.

Other productivity improvement initiatives include programs such as zero-based budgeting, modernization and capability building within the manufacturing footprint. As of third-quarter 2017, the company realized cumulative savings of approximately $1.58 billion from its Integration Program.

The company anticipates solid EBITDA growth to offset the above-mentioned challenges in the fourth quarter, reflecting its ongoing focus on profitable sales, as well as cost savings.

Overall, for the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 96 cents, reflecting a 5.5% year-over-year increase.

Here is What Our Quantitative Model Predicts:

Kraft Heinz does not have the right combination of the two key ingredients - a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher - which is required to be confident of an earnings beat.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks ESP: The Earnings ESP for Kraft Heinz is -1.57%.

Zacks Rank: Kraft Heinz carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

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

The Kraft Heinz Company Price and EPS Surprise

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

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General Mills, Inc. (GIS): Free Stock Analysis Report

Kellogg Company (K): Free Stock Analysis Report

Mondelez International, Inc. (MDLZ): 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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