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Kraft Heinz (KHC) Down 42% YTD: Can the Stock Revive in 2019?

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Things have been quite sour for The Kraft Heinz Company (KHC - Free Report) , which has lost close to 42% this year compared with the industry’s decline of almost 20%. The company has been battling escalated costs and softness in its Canadian business. While these factors have kept investors on the sidelines, we cannot ignore Kraft Heinz’s strong efforts to enhance performance.



Let’s delve deeper.

Here’s Why Kraft Heinz is Troubled

Kraft Heinz’s adjusted EBITDA declined 14.4% to $1,616 million in the third quarter, due to investments in strategic capabilities, and escalated overhead and input costs. Further, adjusted EBITDA lagged management’s expectations. Looking into the fourth quarter, the company anticipates the one-time factors that impacted EBITDA in the third quarter to fall away, expecting a better balance between cost inflation and savings. Consequently, it expects EBITDA growth and expansion of EBITDA margin for the fourth quarter. However, how well the impacts of cost inflation are countered by the company, remains to be seen.

Well, many food companies like Campbell Soup (CPB - Free Report) , General Mills (GIS - Free Report) and Conagra Brands (CAG - Free Report) , among others, are also struggling with cost-related hurdles.

Coming back to Kraft Heinz, the company has been struggling with its Canadian business for three straight quarters now.  In Canada, sales were down 5.6% year over year in the last reported quarter, owing to certain product discontinuations and higher promotional expenses. The top line was also impacted by adverse currency movements and weak organic sales. Volume/mix remained flat, while pricing declined 1.5 percentage points as elevated promotional expenses more than offset the favorable foodservices pricing. Though the company expects Canada to return to growth in the fourth quarter on solid pipeline of activities, we would wait for actions to take course before turning positive.

Can Strategies & Strong U.S. Business Aid the Stock?

Kraft Heinz has been undertaking dedicated endeavors to offset the cost hurdles. To this end, the company has implemented many cost-saving initiatives, including the integration of Kraft Foods and Heinz. Notably, the company delivered $1.7 billion of cumulative Integration Program savings by the end of 2017, primarily focused on work-force reductions along with factory closures and consolidations. Other productivity improvement initiatives include programs such as zero-based budgeting, modernization and capability building within the manufacturing footprint, and building a performance-driven culture in the company.

As part of these initiatives, savings are being re-invested in the business for innovation, brand building and marketing to stimulate top-line growth. The company is also working for whitespace expansion in both food services and geographic channels. Also, Kraft Heinz’s focus on boosting sales through innovation and marketing is noteworthy. Management earlier outlined that the company will make significant investments in marketing, go-to-market capabilities and product development. These capabilities and platforms are expected to further add to the company’s gains in the second half of 2018 and 2019. Also, the company is making innovation efforts in the e-commerce channel, which witnessed nearly 80% growth year to date in the United States.

Though the company’s Canadian business hasn’t been all that impressive, the top line is getting some cushion from its U.S. & ROW units. Evidently, Kraft Heinz witnessed top-line growth in the third quarter of 2018, backed by improvements in the United States and ROW region. Notably, net sales grew 1.8% in the United States, fueled by improved volume/mix that resulted from consumption-led growth across certain categories. In ROW, net sales rose 9.9% and organic sales increased 12.5% on higher pricing and increased volume/mix. Volume/mix improvement was aided by solid growth in condiments and sauces in Latin America.

Management reiterated expectations of delivering organic sales growth in 2018, with the momentum likely to continue in 2019. In fact, this Zacks Rank #3 (Hold) company expects to balance top and bottom-line growth, going forward. So, let’s see if such efforts can help Kraft Heinz’s stock witness a turnaround in 2019. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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