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Kraft Heinz's (KHC) Operating Model Solid, Costs Inflated

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The Kraft Heinz Company (KHC - Free Report) has been benefiting from focus on its operating model. The company’s pricing initiatives as well as efficiency-building plans are aiding growth. However, increased cost inflation is a challenge for Kraft Heinz.

Let’s delve deeper.

Operating Model Holds Promise

In September 2020, Kraft Heinz laid out a new operating model that incorporates five key elements — People with Purpose, Consumer Platforms, Ops Center, Partner Program and Fuel Our Growth. The Consumer Platforms represents a portfolio of six consumer-driven platforms like Taste Elevation, Easy Meals Made Better as well as Real Food Snacking among others. Kraft Heinz is focused on accelerating its international growth strategy based around Taste Elevation and foodservice platform. In this regard, the company signed an agreement to buy sauces-focused business — Assan Foods — from privately-held Turkish conglomerate Kibar Holding in June 2021.

Ops Center element will enable Kraft Heinz to establish an efficient, fast and integrated supply chain network. Management is on track to achieve $2 billion of gross productivity efficiencies through 2024. It expects to deliver $400 million worth of gross efficiencies in 2021. Partner Program element is designed to create solid customer partnerships and develop new strategic partnerships.

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The Fuel Our Growth strategy is aimed at investing in growth opportunities, solidify its long-term market position as well as staying committed to boost shareholder 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. Keeping this in mind, Kraft Heinz sold its nuts business to Hormel Foods Corporation (HRL - Free Report) in June 2021. Also, the company announced an agreement to offload its Natural, Grated, Cultured and Specialty cheese businesses to a U.S. affiliate of Groupe Lactalis in September 2020.

What Else is Working in Kraft Heinz’s Favor?

Solid pricing initiatives have been aiding Kraft Heinz for a while now. In second-quarter 2021, pricing rose 1.5 percentage points year over year with growth in all reporting segments. The upside can be attributed to favorable trade expenses timing in the United States along with increased inflation-justified pricing in the foodservice as well as retail channels. During the quarter, pricing in the United States moved up 1.3 percentage points. In Canada and International markets, pricing moved up 1.9 percentage points each.

In terms of cost savings, the company has been increasing visibility and control of its cost components. It is also keeping a close watch on investments toward enhancing sales and customer services. Further, the company is on track with examining its SKU’s to remove complexities and boost mix. In this regard, the company’s Ops Center platform has been driving efficiency gains via simplification and waste reduction.

Hurdles on Way

Kraft Heinz is grappling with increased cost inflation, which hurt the company’s results in the second quarter of 2021. Adjusted EBITDA fell 5.2% year over year. Excluding a positive 1.8 percentage point impact from currency, the metric was hurt by higher cost inflation, lower shipments and an unfavorable mix compared with the solid 2020 period.

Management, in its last earnings call, highlighted that it expects gross cost inflation in the middle-single-digit range across full cost basket for 2021. For the third quarter, constant-currency adjusted EBITDA is likely to decline by low-single-digit percentage from 2019 levels. When compared with the 2020 period, the metric is expected to fall in low-teens percentage during the quarter.

That being said, focus on the aforementioned upsides is likely to help this Zacks Rank #3 (Hold) company overcome such hurdles. Kraft Heinz’s stock has increased 3.4% so far this year compared with industry’s 1.1% growth.

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