Mondelez International, Inc. (MDLZ Quick QuoteMDLZ - Free Report) has been focused on its core chocolate and biscuit categories, which has been working well for the company. To this end, Mondelez has undertaken several acquisitions that are yielding positively. These upsides and strength in emerging markets have been aiding the company amid elevated costs and margin concerns.

Let’s delve deeper.

Mondelez Looks Well-Placed

As consumers prefer snacking over traditional meals, Mondelez’s core categories 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.

The company’s core chocolate and biscuit categories remain sustainable in both developed and emerging markets. Both these categories registered double-digit growth in the fourth quarter of 2022. Management is focused on expanding the categories as these have considerable scope for growth (in terms of penetration and per capita consumption). MDLZ intends to generate around 90% of its revenues through these two core categories in the long run.

Mondelez has undertaken several acquisitions to strengthen its snacking portfolio. In its third-quarter 2022 earnings release, the company noted that it closed the Ricolino buyout, which is expected to double the size of its Mexico business. In August 2022, it closed the buyout of Clif Bar.

Further, Mondelez acquired the Chipita S.A. business in January 2022, which is a major producer of sweet and salty snacks in Central and Eastern Europe. Contributions from the Ricolino, Clif Bar and Chipita buyouts boosted net revenues in the fourth quarter of 2022.

Moreover, Mondelez announced the sale of its developed market gum business to Perfetti Van Melle in the fourth quarter. This move will help fund its recent buyouts and streamline its portfolio. Also, it intends to sell the Halls business in the near future. These actions underscore the company’s intention to focus on areas with greater potential.

Moving on, MDLZ remains encouraged about the underlying emerging market strength. In the fourth quarter of 2022, revenues from emerging markets increased 23.3% to $3,320 million while rising 24.7% on an organic basis. The company is particularly witnessing strength in China and India. Also, Mondelez saw notable strength in Brazil, China, India, Russia, Mexico, the Western Andean countries and Southeast Asia.

Downsides

Mondelez has been battling cost inflation for a while now. In the fourth quarter of 2022, the adjusted gross profit margin contracted by 120 basis points (bps) to 36% due to increased raw material and transportation costs and an adverse mix. Also, the adjusted operating income margin contracted by 30 bps to 15% due to inflated input costs and an adverse mix.

MDLZ is battling challenges related to global cost inflation, the energy crisis, recession-related worries in Europe and supply-chain uncertainty. In its fourth-quarter earnings release, Mondelez stated that it expects another year of double-digit inflation stemming from the continued elevated cost of packaging, energy, ingredients and labor.

For the first quarter of 2023, the company anticipates lower margins due to lower volumes in Europe. The European region is expected to remain drab in the second quarter as well. Apart from these factors, Mondelez expects higher interest expenses and pension costs in 2023.

Wrapping Up

The resilience of its snacking products, solid brands, strength in emerging markets and gains from the recent acquisitions are likely to help Mondelez add new leaves to its growth story.  For 2023, it expects organic net revenues of 5-7%. MDLZ envisions a high-single-digit increase in adjusted earnings per share or EPS at constant currency.

Shares of this Zacks Rank #3 (Hold) company have rallied 22.7% in the past six months compared with the industry’s growth of 9.3%.

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