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Mondelez (MDLZ) Faces Cost Woes, Banks on Efficient Pricing

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Most food companies are encountering escalated input cost hurdles, and Mondelez International, Inc. (MDLZ - Free Report) is not immune to the same. The company has been battling cost inflation and supply-chain headwinds for a while now. These hurdles worsened due to the Ukraine war. Adverse currency movements are also a threat to its performance.

That said, efficient pricing endeavors are an upside. Mondelez has also been gaining from strength in emerging markets and its focus on expansion through acquisitions.

The company has been expanding its snacking category. As consumers prefer snacking over traditional meals, the company’s core categories — chocolates and biscuits — have historically depicted resilience to economic downturns and pricing actions. Consumers in developed countries consider chocolates and biscuits as affordable indulgences and one of the most-valued snacking products.

Let’s take a closer look.

Factors Acting as Deterrents

In the second quarter of 2022, the adjusted gross profit margin contracted by 210 basis points (bps) to 37.9% due to increased raw material and transportation costs and an adverse mix. Also, the adjusted operating income margin contracted by 110 bps to 15.1% due to inflated input costs and an adverse mix.

Mondelez is seeing input cost inflation, especially for energy, transportation, packaging, wheat, dairy and edible oils. The company is also navigating through supply-chain bottlenecks due to labor shortages at third parties.

Management’s guidance for 2022 reflects anticipation of the elevated cost of goods sold inflation, the timing impact of extra pricing actions and the impacts of the Ukraine war.

While commodity cost inflation may ease, management expects other costs, such as wages, to reflect considerable inflation. Apart from input cost inflation, the guidance also includes investments to support brands and other growth-oriented investments.

Mondelez’s vast global presence exposes it to the risk of volatile foreign currency movements. On its second-quarter 2022 earnings call, management stated that currency movements are likely to negatively impact net revenues by nearly 5% and adjusted EPS by 22 cents in 2022.

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Robust pricing actions have been offering support to Mondelez. In the second quarter of 2022, pricing actions boosted organic net revenue growth and offered partial respite to the company’s adjusted gross profit margin and adjusted operating margin. These were otherwise hurt by cost inflation and an adverse mix.

The company remains encouraged by the underlying emerging market strength. In the second quarter of 2022, revenues from emerging markets increased by 22.4% to $2,806 million while rising 22.5% on an organic basis. The company saw strength in all major business units.

On its second-quarter earnings call, MDLZ stated that consumer confidence was reverting to pre-pandemic levels in emerging markets. The company’s core categories saw robust volumes and penetration growth despite higher pricing.    

Mondelez has always been keen on expanding its business through acquisitions. On Aug 2, 2022, Mondelez acquired Clif Bar, which boasts a robust snack bar business worth more than 1 billion. On Apr 25, the company announced that it inked a deal to buy Ricolino, which is likely to strengthen its Mexican footprint.

In January 2022, the company acquired Chipita S.A., which is a major producer of sweet and salty snacks in Central and Eastern Europe. Contributions from this acquisition boosted net revenues in the quarter under review.

In 2021, Mondelez took over a renowned sports performance and active nutrition brand — Grenade. Grenade’s on-trend and tasty products position Mondelez to grow in the United Kingdom as well as other markets. Further, the company acquired the Australia-based food company — Gourmet Food Holdings — which operates in the premium biscuit and cracker category.

Mondelez completed the acquisition of Hu Master Holdings, the parent company of Hu Products, on Jan 4, 2021. The acquisition of Hu provides further growth opportunities in chocolate and cross-category potential in crackers for Mondelez.

The company’s focus on undertaking acquisitions to gain scale in its categories and distribution capabilities bodes well. Mondelez is committed to increasing its focus on areas with higher growth potential. The company divested its beverage assets in 2021 and used the net proceeds as investment in its brands and growth drivers.

On its second-quarter 2022 earnings call, Mondelez declared plans to offload its developed market Gum & Halls businesses to increase its focus on its faster-growing chocolate and biscuit businesses.

Shares of this Zacks Rank #3 (Hold) company have increased 1.3% in the past three months compared with the industry’s growth of 6.1%.

Consumer Staple Stocks Worth a Look

Some better-ranked stocks from the sector are The Chef's Warehouse (CHEF - Free Report) , Lancaster Colony ((LANC - Free Report) ) and J. M. Smucker (SJM - Free Report) .

Chef’s Warehouse, a distributor of specialty food products in the United States, currently sports a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Chef’s Warehouse’s current financial-year sales suggests growth of 40.7% from the year-ago reported number.

Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently sports a Zacks Rank of 1. LANC delivered an earnings surprise of 170% in the last reported quarter.

The Zacks Consensus Estimate for Lancaster Colony’s current financial-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.

J. M. Smucker, which manufactures and markets branded food and beverage products, carries a Zacks Rank #2 (Buy) at present. J. M. Smucker has a trailing four-quarter earnings surprise of 20.8%, on average.

The Zacks Consensus Estimate for SJM’s current financial-year sales suggests growth of 4.4% from the year-ago period’s reported figure.

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