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Why Is Kraft Heinz (KHC) Down 6.2% Since the Last Earnings Report?

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It has been about a month since the last earnings report for The Kraft Heinz Company (KHC - Free Report) . Shares have lost about 6.2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Second-Quarter 2017 Results

Kraft Heinz posted second-quarter 2017 results wherein earnings surpassed the Zacks Consensus Estimate but missed the same on revenues.

Earnings

Adjusted earnings per share of 98 cents surpassed the Zacks Consensus Estimate of 96 cents by 2.1%. Earnings grew 15.3% year over year on significant gains because of cost-saving initiatives.

Sales

Reported sales of $6.68 billion fell shy of the Zacks Consensus Estimate of $6.69 billion marginally by 0.3% and also declined 1.7% year over year due to soft consumer demand in North America and Canada. The company expects sales growth to ramp up in the second half of 2017. The reported figure includes an unfavorable 0.8% impact from currency.

Organically (excluding currency), sales declined 0.9%.

Volume/mix decreased 0.5% in the quarter against a 3.7% decline in the previous quarter. The slump was due to weak demand of cheese, meats, and food services in its biggest market, the U.S. However, these were partly offset by positive contributions from condiments and sauces in all business segments. Pricing declined 0.4% in the quarter against 1% increase in the preceding quarter.

The company has been witnessing weakness in top line for the last several quarters. Soft spending by U.S. shoppers along with rapid changes in consumer preferences and behavior are hurting the company’s categories. Kraft Heinz, like many other U.S. food producers, Mondelez International, Inc. and General Mills, Inc. among others, have been struggling due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food.

Operating Highlights

Gross profit of $2.68 billion increased 5.9% year over year.

Adjusted EBITDA (constant currency) was up 1.9% to $2.1 billion in the second quarter owing to cost cutting initiatives.

Quarterly Segment Discussion

U.S.: Net sales of $4.6 billion declined 1.2% year over year. Organic sales dropped 1.2% on lower volumes. Volume/mix decreased 0.8% in the quarter compared with 4.2% in the last quarter. Pricing was down 0.4%.

The downside was primarily due to select distribution losses in cheese and meats as well as lower shipments in foodservice that overshadowed the benefits from a shift in Easter-related sales as well as gains in frozen, macaroni and cheese, and condiments and sauces.

Canada: Net sales of $597 million declined 6.4% year over year despite a 3.3% favorable impact from currency. Organically, its sales declined 3.1%. Volume/mix grew 0.6%, attributable to growth in condiments and sauces that more than offset the discontinuation of select cheese products. Pricing decreased 3.7%.

Europe: Net sales of $595 million declined 4.9% year over year due to 4.1% currency headwinds. Organically, sales fell 0.8% amid a challenging consumer and retail environment. Volume/mix was up 0.8% against 0.4% in the preceding quarter as robust consumption gains in condiments and sauces and gains in food service. Pricing declined 1.6%.

Rest of World: Net sales of $851 million increased 1.6% year over year. Organically, sales grew 3% on higher pricing. While pricing increased 3.7%, volume/mix fell 0.7%.

Outlook Skewed Toward Second Half of 2017
 
Kraft Heinz does not provide formal guidance. However, the company expects organic sales growth to ramp up toward the second half of 2017. This will likely be driven by stronger sales performance and cost savings that will benefit the final quarter of the year.

Kraft Heinz remains on track to deliver $1.7 billion cumulative Integration Program savings by the end of 2017. The company remains focused on defined strategy of investing, in innovation, marketing, and go-to-market capabilities as it speed up the savings and efficiencies within business.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There have been six revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 6% due to these changes.

VGM Scores

At this time, Kraft Heinz's stock has a nice Growth Score of B, though it lags a lot on the momentum front with an F. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We expect below average returns from the stock in the next few months.




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