Kraft Heinz shares plunge more than 28% after $12.6B loss, SEC investigation and dividend cut
- Kraft Heinz's stock plummeted almost 25% in after-hours trading — which grew to more than 28% after markets opened on Friday — after several bombshells in its latest earnings report, released Thursday evening. The company wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, resulting in a $12.6 billion net loss. It slashed its dividends more than 36%. And it disclosed an investigation by the U.S. Securities and Exchange Commission into its procurement accounting and control policies.
- Despite these issues, sales actually grew in the last quarter compared to a year ago. Organic net sales were up 2.4%, to nearly $6.9 billion. But CEO Bernardo Hees said in the report that the quarter was difficult because of unanticipated inflation and less savings than had been hoped for, as well as supply chain issues.
- "We were overly optimistic on delivering savings that did not materialize," Hees said on a conference call with investors, according to a transcript.
Looking at the catastrophic sell off of Kraft Heinz in after-hours trading Thursday, it's hard to imagine a way to describe the financial news that could sound too dramatic. After all, the write-down and associated losses added up to an operating loss of 1,024% when compared to a year ago. Any piece of this news on its own could lead to stock price drop offs and sell-offs. All of it hitting at once is a disaster.
Kraft Heinz has used zero-based budgeting — starting with a clean slate of expenses that need to be justified each quarter instead of sticking with a prevailing plan — to boost margins since the two CPG giants merged in 2015. But the problems had nothing to do with that strategy. In the earnings call, Hees stressed the problem came from the supply chain and operations, though it's unclear how already-existing supply chain problems could snowball into such a large write-down in a single quarter.
Some of the cracks in Kraft Heinz's financial foundation were visible in the company's previous earnings report, when modest sales increases were reported but shareholders saw a 33.3% net loss. Inflation, supply chain and marketing costs all were ticking upward in the third quarter, gobbling up net revenues.
Combining those problems with consumer trends toward less processed food adds up to big problems for the mega-company. Though Executive Vice President and CFO David Knopf said in the investor call transcript that the write-down is not a result of Kraft cheeses and Oscar Mayer cold cuts losing their luster with consumers, both products are thoroughly processed CPG stalwarts that have been in meat and dairy cases for generations. It's conceivable that consumers are passing on these products for ones that are more clean label.
The SEC investigation is completely separate and was repeatedly dismissed by company leaders on the earnings call and in the report as immaterial. When the agency subpoenaed Kraft Heinz in October as part of an investigation into its procurement practices, the company cooperated — and conducted — its own investigation. Kraft Heinz found that $25 million should have been recorded in previous quarters. The company placed those funds all into this past quarter, which company officials said should take care of the agency's concerns. The $25 million makes up only a tiny fraction of total procurement costs; Knopf noted in the earnings call that the company has a total procurement spend of $11 billion.
Even though the investigation was relatively inconsequential, an investigation by itself can be enough to send shares into a tailspin. After Hain Celestial reported accounting inconsistencies leading to an internal investigation in 2016, its stock plunged as much as 27.5%.
As for the dividend cut, company officials said in the earnings call the funds can be used to pay down outstanding debt. This is a smart long-term move toward company stability, but it may turn off some investors who are more focused on immediate profits.
It seems like there's nowhere for Kraft Heinz to go but up. And company leaders are definitely aiming there. In fact, listening to them speak on the earnings call makes it seem like the terrible numbers, the enormous write down and the SEC investigation are not even current problems. Knopf said the company anticipates a "step backwards" this year, but is confident in future profit growth through fully leveraging brands, costs and capabilities.
Hees added that the industry is challenged with competition, lack of money to reinvest in old brands and fragmentation of consumer demand, and, of course, inflation.
"We are choosing to focus on improving our long-term growth trajectory and returns by: driving consumption and market share; leveraging next-generation capabilities for brand and category advantage; and importantly, securing the right talent in areas critical to growth," Hees said on the call.
But that's not the only way the company wants to build its financial returns. Knopf hinted Kraft Heinz may be looking to divest some brands. Other large CPG companies are also adopting this strategy, selling off some of their further-from-core brands to place more emphasis on better opportunities for sales and innovation. Campbell Soup is selling its Fresh and international divisions to refocus on soup, Nestlé sold its U.S. confectionery brands and Kellogg is divesting its cookies. Which Kraft Heinz brands may be on the chopping block is not known — but considering their long history, the cheese and cold cuts that caused the write down are probably safe.
Divesting brands will also flip Kraft Heinz's current strategy, but not in an entirely unexpected way. After being rebuffed by Unilever for its attempted $143 billion takeover bid in 2017, Kraft Heinz has made some acquisitions, but nothing too flashy or large. Instead, the CPG giant has purchased smaller companies like Primal Kitchen, which fit into current health and wellness trends. It's established the $100 million venture capital fund Evolv Ventures, which is investing in food technology. And the company's Springboard incubator program will be starting its second year soon. If this is where Kraft Heinz wants to focus, surely it can spare some of its more than 200 brands to get there.
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