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Soft U.S. Sales Spoil Kraft Heinz's Show, Stock Down 26% YTD

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The Kraft Heinz Company (KHC - Free Report) has been off investors’ radar for quite some time now. This renowned consumer packaged food and beverage company has plummeted 26.2% so far this year, faring worse than the industry’s drop of 7%. On that note, let’s take an insight into the factors troubling Kraft Heinz and see what’s in store for the company ahead.

Factors Making Kraft Heinz a Bland Pick

Kraft Heinz’s U.S. sales have been declining for more than a year now, with lower cheese shipments being a concern in many quarters. Sales in this region, which contributed nearly 67% of the company’s top line in the second quarter, dipped close to 2% year over year (also on an organic basis). This was accountable to lower volume/mix that stemmed from lower shipments of nuts, frozen and cheese, somewhat compensated by improvement in ready-to-drink beverages. Well, Kraft Heinz, like many other U.S. food producers, struggled due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food.

In fact, Kraft Heinz has been witnessing soft sales in Canada as well. In the second quarter, Canadian sales went down 4.5% year over year, owing to an 8.2% drop in organic sales. Volume/mix declined 8.8%, owing to absence of promotional activities that benefitted results in the year-ago period. Adverse trade inventory adjustments and product discontinuations also hurt results. Near-term hurdles in this region are expected to linger in the third quarter.

Moving to the cost front, Kraft Heinz’s adjusted EBITDA declined 4.4% to $1,974 million in the second quarter due to escalated input costs, unfavorable volume/mix and increased strategic investments. Cost inflation mainly stemmed from escalated freight and resin expenses along with costs related to the company’s aggressive commercial investment agenda. Management expects cost inflation, mainly freight, to hinder EBITDA in the near term.

Notably, input cost inflation has been posing threats to many other food companies like Conagra Brands (CAG - Free Report) , Campbell Soup (CPB - Free Report) and General Mills (GIS - Free Report) , among others. Coming back to Kraft Heinz, management expects its third-quarter adjusted EBITDA to decline at a greater rate compared with the decline noted in the first half of 2018. Also, the company remains exposed to tariff related risks, which are affecting foil and aluminum expenses in the United States.

The Bottom Line

While U.S. and Canada regions did not work in Kraft Heinz’s favor in the second quarter, improvements in EMEA and ROW regions helped the company post sales growth. Further, Kraft Heinz has solid innovation initiatives planned in the foodservice space to fuel growth across all regions, while it is also making efforts in its growing e-commerce channel. Also, the company has been focused on cost-saving and productivity initiatives, primarily focused on work-force reductions along with factory closures and consolidations.

Though these initiatives position Kraft Heinz well for the long run, we remain somewhat apprehensive about the company’s near-term picture. In fact, analysts also seem to be less constructive on this Zacks Rank #4 (Sell) stock’s performance. Evidently, the Zacks Consensus Estimate for the third quarter and fiscal 2018 have gone down from 92 cents to 82 cents and from $3.78 to $3.71, respectively, over the past 90 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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