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Mondelez's (MDLZ) Focus on Core Categories Aids Amid Challenges

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Mondelez International, Inc. (MDLZ - Free Report) has been navigating a tough operating landscape, driven by efficient cost management, strategic pricing and strong momentum in emerging markets.  The company has been making solid efforts to reshape its portfolio through acquisitions like Ricolino and Clif Bar, which, coupled with prudent divestitures, have been helping enhance growth potential.

Mondelez’s focus on core categories such as chocolate, biscuits and baked snacks has been working well, as these categories have demonstrated resilience during economic downturns.

All That’s Working Well

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. This was witnessed in the first quarter of 2024, wherein Mondelez’s core categories of chocolate, biscuit and baked snacks continued to show significant resilience and lower elasticity compared to the broader food universe. The snacking category consumers remain extremely loyal to the brands they love.  

In the first quarter, biscuits and baked snacks increased 0.6%, and the chocolate category registered sales growth of 5.8%. Management is focused on expanding its chocolate, biscuit and baked snacks categories as they present opportunities for solid growth and profitability. The company is on track to generate around 90% of its revenues through these categories by 2030.

Mondelez remains encouraged by the underlying emerging market strength. During the first quarter of 2024, the company continued to witness strength in emerging markets, wherein consumer confidence remained solid and categories stayed resilient. In the quarter, revenues from emerging markets increased 3.8% to $3,733 million while rising 8.3% on an organic basis due to growth in several key markets.

Mondelez has been witnessing year-over-year growth in its organic net revenues, which jumped 4.2% in the first quarter of 2024. Favorable pricing (up 6.3 percentage points or pp) contributed to organic net revenues. The company expects 2024 organic net revenue growth in the upper range of 3-5%. MDLZ remains on track with its pricing strategies to counter input cost inflation by leveraging the headline price as well as revenue growth management. Mondelez envisions high-single-digit adjusted earnings per share (EPS) growth on a constant-currency basis.

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Obstacles on Way

Mondelez is encountering a challenging and dynamic operating environment. In several markets, shoppers are becoming increasingly price-sensitive, leading them to choose smaller pack sizes in both biscuits and chocolates. In its first-quarter 2024 earnings release, management stated that consumer confidence varied by region, with North America and Australia/New Zealand displaying mixed signals, Europe seeing improvement and emerging markets remaining robust. Nonetheless, the snacking category’s consumers remain extremely loyal to the brands they love.

Mondelez has been battling cost inflation for a while now. Although offset by pricing and lower manufacturing expenses, the company’s adjusted gross margin was affected by escalated raw material and transportation costs in the first quarter of 2024. The adjusted operating margin was also partially hurt by input cost inflation, as well as increased advertising and consumer promotion costs (up to high single digits).

For 2024, Mondelez expects inflation to increase by high single digits due to escalated cocoa prices. However, Mondelez is on track with efficient pricing actions to cover the inflation. The company’s shares have tumbled 9.1% in the past year compared with the industry’s decline of 11.3%.

Wrapping Up

Continuous reinvestments in its brands and capabilities, along with impressive portfolio-reshaping efforts, place Mondelez well for future growth.  By focusing on core categories such as chocolate, biscuits and baked snacks, enhancing brand appeal, prioritizing operational efficiency and cost management and empowering team members, this Zacks Rank #3 (Hold) company is poised to deliver strong performance for years to come.

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