Kraft Heinz posts lopsided results, with higher sales and lower revenues
- Kraft Heinz posted a modest 1.6% sales gain — up to nearly $6.4 billion when compared with the near $6.3 billion a year ago, according to the company's latest earnings report. Sales were strong in the United States, which saw a 1.8% increase in sales, to about $4.4 billion.
- Higher sales did not translate into higher profits or earnings for shareholders. The earnings release describes these mitigating factors as one-off factors, including "investments in strategic capabilities," higher overhead and input costs, and "desire to insure customer service." Operating income was down 30.4%, there was a 33.3% net loss attributable to shareholders, and diluted earnings per share was down 33.8% to 51 cents — a drop from 77 cents in the year-ago period.
- Despite the expenses eating into earnings, CEO Bernardo Hees was upbeat. "Three months ago, we said that we expected organic growth from Q3 onwards, driven by a stronger more incremental marketing and innovation pipeline, leveraging investments in category management and go-to-market capabilities and supported by incremental merchandising spend and best-in-class customer service," Hees said in the earnings call, according to a transcript. "Today, we believe and are confident our Q3 results show that the turnaround of our top line performance is firmly underway, not just in terms of headline organic growth, but also real volume growth."
Kraft Heinz has been working through new products and new ventures to reclaim its spot at the top of the food business. And while it's successfully made a splash with products like Mayochup and throwback items like Planters Cheez Balls in a can, launched the Springboard incubator program and committed $100 million to invest in startups through Evolv Ventures, expenses elsewhere stopped the CPG giant from earning the kind of money that matters to shareholders. Hees said in the earnings call that it is important to recognize that Kraft Heinz has seen real commercial growth, and is making changes quickly to adapt to consumer trends. According to the report, consumption of beverages, nuts, bacon, refrigerated meal combinations and cream cheese are all up in the United States.
The CPG giant — which owns consumer staples ranging from its iconic Macaroni and Cheese to Planters nuts to Lunchables — has been tapping into data for better marketing and brand building. Hees said on the call that 75% of Kraft Heinz marketing impressions are now classified as "quality," helping top line growth and beating industry averages. Kraft Heinz is deploying more resources toward category management, and has more than doubled its roster of employees who go into stores in order to help products move faster.
Technology has also been a priority for the company. E-commerce sales are up about 80% this year so far, Hees said on the call. The company is currently working to revamp its recipes website, build mobile technology that can learn about consumers, recommend meals and seamlessly connect with grocers, Hees said. Additionally, Evolv Ventures will help drive technology to build a better consumer experience — and more value for Kraft Heinz.
"From a capability building perspective, these initiatives can improve our ability to engage consumers in an environment characterized by expanding retail channels and fast-changing shopping patterns," Hees said on the call.
All of this sounds good, but the numbers don't reflect a marketing home run. Where did Kraft Heinz go wrong? Company executives discussed several issues on the earnings call, many of which the company could not stop. Inflation was higher than expected in the United States. Transportation costs ticked upward, putting the same kind of pressure on Kraft Heinz that many other food manufacturers are facing. The new marketing initiatives took upfront investments. Prioritizing customer service took more funds. The method by which employees earn bonuses has changed, which had a ripple effect on earnings. The company delayed some planned productivity initiatives in factories in order to keep products moving quickly.
"We continue to believe we're in a strong position to deliver organic growth for the full year and sustain that momentum into 2019," Executive Vice President and CFO David Knopf said on the call. "We also expect a much better balance of top and bottom line growth going forward.
"2018 has clearly been a year where results have been more or less dominated by a number of transitory issues, on both the sales and cost sides of the equation, that we do not expect to repeat."
It seems like Kraft Heinz's long view of growth is shaped just by what it sees in the mirror — and through startups and tech firms it can help along the way. The company, which has not attempted a major acquisition since it was rebuffed by Unilever in early 2017, hasn't mentioned any acquisition plans lately. It was rumored to be a suitor for Campbell Soup, but it has been said that Kraft Heinz determined it is not interested.
But it's apparent Kraft Heinz has enough to work on without also undertaking a major acquisition. Is it possible for the manufacturer to bring its top and bottom lines back in sync? If the marketing and tech plans outlined in the earnings call come to fruition, it's certainly a possibility.
- Kraft Heinz Kraft Heinz Reports Third Quarter 2018 Results
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