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Kraft Heinz (KHC) Gains on Pandemic-Led Demand, Hurt by Costs

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The Kraft Heinz Company (KHC - Free Report) looks well placed, courtesy of growth endeavors like its operating model, which was laid out in September 2020. Also, the company is on track with efficiency-building plans. Apart from this, it is gaining from burgeoning demand amid the pandemic-led higher at-home consumption. However, the company is battling higher costs and softness in Canada business.

Let’s discuss further.

What’s Yielding Well for Kraft Heinz

Kraft Heinz is witnessing rising demand for its products thanks to the coronavirus-led higher at-home consumption. In fact, burgeoning demand amid the pandemic bolstered the company’s fourth-quarter 2020 results. The top and the bottom line surpassed the Zacks Consensus Estimate and increased year over year. Organic net sales rose 6% on the back of sustained growth momentum in retail business and favorable pricing. Volume/mix increased 1.2 percentage points thanks to continued at-home consumption growth, partly stemming from the pandemic.


 

Moreover, Kraft Heinz is committed to its operating model, which was laid out last year. The model incorporates five key elements — People with Purpose, Consumer Platforms, Ops Center, Partner Program and Fuel Our Growth. In its last earnings call, management highlighted that within consumer platform, the company’s top-priority Grow portfolio increased 15% in retail channels along with acceleration of growth in emerging markets. Ops Center element will enable Kraft Heinz to establish an efficient, fast and integrated supply chain network. Notably, the company achieved nearly $400 million of gross productivity efficiencies during 2020. Moreover, Partner Program element is designed to create solid customer partnerships and develop new strategic partnerships.

Lastly, the Fuel Our Growth strategy will enable the company to invest in growth opportunities, solidify its long-term market position and boost shareholders’ returns. Also, this strategy will help the company manage its portfolio and accelerate its strategic plan, augment geographic presence, increase focus on growth areas as well as undertake sustainable pricing actions.

In terms of cost savings, Kraft Heinz is increasing visibility and control of its cost components. It has also been keeping a close watch on investments made toward enhancing sales and customer services. Further, the company is on track with examining its SKUs to remove complexities and boost mix. In this regard, the company’s Ops Center platform drove efficiency gains via simplification and waste reduction. Notably, Kraft Heinz benefited from simplifying its assortment and improving capacity through a 16% reduction in SKUs during 2020. In fact, management is on track to reduce SKU further in 2021.

Hurdles on Way

Kraft Heinz is witnessing rise in selling, general and administrative expenses, excluding impairment losses for a while. Notably, the metric increased from $837 million reported in the year-ago quarter to $973 million during fourth-quarter 2020. Additionally, the company is incurring increased supply chain costs, including pandemic-induced expenses, higher incentive compensation as well as significant investments in marketing and sales.

Apart from this, sales in Kraft Heinz’s Canada segment is declining year over year since the past few quarters. During the fourth quarter, net sales declined 2% in the segment, while volume/mix fell 11 percentage points. The segment is witnessing reduced coffee shipments, which include the impact from the McCafe exit and foodservice declines.

That being said, we believe that the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. Kraft Heinz’s shares have increased 18.3% in the year-to-date period compared with the industry’s growth of 7%.

Top 3 Food Bets

Sanderson Farms, Inc. (SAFM - Free Report) , currently sporting a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 43.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pilgrim’s Pride Corporation (PPC - Free Report) , currently carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 24.2%.

The J. M. Smucker Company (SJM - Free Report) , currently carrying a Zacks Rank #2, has a long-term earnings growth rate of 1.7%.

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