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Kraft Heinz (KHC) Poised on Transformation & Pricing Efforts

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The Kraft Heinz Company (KHC - Free Report) is benefiting from efforts to transform its business to unleash its potential. In this regard, the company’s recently-unveiled AGILE@SCALE strategy is noteworthy. The iconic consumer packaged food and beverage company’s strategic pricing efforts are yielding amid a rising cost environment.

Let’s discuss this further.

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Transformation on Track

The Kraft Heinz Company has successfully deployed its Operating Model in the last two years. The model incorporates five key elements — People with Purpose, Consumer Platforms, Ops Center, Partner Program and Fuel Our Growth. Thanks to Kraft Heinz’s effective portfolio management, nearly two-thirds of its business falls within fast-growing consumer platforms. As part of its next transformation phase, management unveiled AGILE@SCALE in February 2022. The strategy will help Kraft Heinz enhance its agile expertise and capabilities via partnerships with technology giants and cutting-edge innovators. The company will leverage its financial flexibility to take over other capabilities.

Courtesy of an improved portfolio and Operating Model combined with the promising AGILE@SCALE strategy, the company increased its long-term growth targets in February 2022. The company now expects organic net sales growth of 2-3% in the long term. The metric was expected to rise 1-2%. Adjusted EBITDA growth is now envisioned in the range of 4-6%, up from the previous guidance of 2-3% growth. Management now expects to see a 6-8% adjusted earnings per share (EPS) growth in the long term. The metric was previously expected to rise4-6%. The outlook reflects the company’s business reorientation to date as well as optimism surrounding its next-phase transformation. Apart from this, Kraft Heinz expects to generate at least $2 billion of gross efficiencies, slightly ahead of its previous outlook.

Pricing Efforts: Key Driver

Solid pricing initiatives have been aiding Kraft Heinz for a while now. In fourth-quarter 2021, the company’s pricing rose 3.8% year over year with growth in all reporting segments, reflecting inflation-justified price increases across the foodservice and retail channels. During the quarter, pricing in the United States moved up 3.6 percentage points. In Canada, pricing increased 5.2 percentage points and the same increased 4 percentage points in the International markets. Kraft Heinz’s robust pricing actions are likely to help the company mitigate the adverse impacts of cost inflation.

Cost Hurdles

During fourth-quarter of 2021, Kraft Heinz’s gross profit of $2,162 million declined 14.3% from $2,523 million reported in the year-ago quarter. Adjusted EBITDA fell 10.2% to $1,606 million on escalated commodity costs, including core commodity and packaging costs along with procurement, logistics and manufacturing cost inflation. In its last earnings call, management highlighted that it continues to witness rising input costs. Incidentally, management expects percentage margins to remain under pressure for the first half of 2022 as pricing continues to catch up to inflation.

Nevertheless, its impressive transformation and pricing efforts are likely to help the Zacks Rank #3 (Hold) company stay afloat amid such hurdles. Kraft Heinz’s shares have increased 4% in the past six months against the industry’s decline of 1.6%.

Solid Food Bets

Some better-ranked stocks are Sanderson Farms, Inc. , Flowers Foods (FLO - Free Report) and Pilgrim’s Pride (PPC - Free Report) .

Sanderson Farms, the producer of fresh, frozen and minimally-prepared chicken, currently sports a Zacks Rank #1 (Strong Buy). Shares of SAFM have dropped 3.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Sanderson Farms’ current financial year sales and EPS suggests growth of 18% and 56.1%, respectively, from the year-ago reported number. SAFM has a trailing four-quarter earnings surprise of 46.8%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2 (Buy). Shares of Flowers Foods have increased 6.9% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of 9%, on average.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen, and value-added chicken and pork products, carries a Zacks Rank #2. Shares of Pilgrim’s Pride have moved down 19.7% in the past six months.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financialyear EPS suggests growth of 19.7% from the year-ago reported number. PPC has a trailing four-quarter earnings surprise of 24.9%, on average.


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