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Can Saving Plans Drive Kraft Heinz (KHC) in Q4 Earnings?

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The Kraft Heinz Company (KHC - Free Report) is slated to release fourth-quarter 2018 results on Feb 21. This renowned packaged food and beverage company delivered a negative earnings surprise of 3.7% in the last reported quarter, though it has outperformed the Zacks Consensus Estimate by average of 2.1% over the trailing four quarters. Let’s see how the company is positioned ahead of the upcoming quarterly results.

What to Expect?

The Zacks Consensus Estimate has gone down by a couple of cents in the past 30 days to 94 cents, which however reflects growth of 4.4% from the year-ago quarter’s figure. Further, the consensus mark for revenues is $6,954 million, depicting rise of 1.1% from the year-ago quarter’s figure.

Will Hurdles be Offset?

Soft Canada sales and high input costs pose worries for Kraft Heinz’s upcoming performance.  In Canada, sales were down 5.6% year over year in the third quarter, owing to certain product discontinuations and higher promotional expenses. The top line was also negatively impacted by 4.2 percentage point from currency and 1.4% reduction in organic sales. Sales in this region have been declining year over year for three straight quarters now. Though the company expects Canada to return to growth in the fourth quarter on solid pipeline of activities, we would wait for actions to actually take course.

Further, 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. These headwinds more than offset growth in organic sales while also impacting overall profitability in the third quarter. Well, many other food companies like Campbell Soup (CPB - Free Report) , TreeHouse Foods (THS - Free Report) and General Mills (GIS - Free Report) , among others, have been grappling with cost-related hurdles.

Coming back to Kraft Heinz, the company has implemented many cost-saving initiatives. 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.

We expect such efforts to help counter cost-related woes in the quarter under review. In fact, while reporting third-quarter results, management stated that it anticipates one-time factors that impacted EBITDA in the quarter to reduce in the fourth quarter, calling for a better balance between cost inflation and savings. Consequently, it expects EBITDA growth and expansion of EBITDA margin for the quarter.

Further, Kraft Heinz’s focus on innovation and marketing is noteworthy. To this end, the company earlier unveiled that it will make significant investments in marketing, go-to-market capabilities and product development. These capabilities and platforms were expected to add to the company’s gains in the second half of 2018 and 2019. Kraft Heinz has been focusing on improving many areas, including Indonesia soy sauces, U.S. cold cuts, baby food in Canada and its non-measured channel shares in the U.K. Further, Kraft Heinz has various innovation initiatives planned for the foodservice space to fuel additional growth across all regions. Also, the company is making innovation efforts in the e-commerce channel. These efforts along with solid cost-saving endeavors are likely to aid Kraft Heinz’s growth in the impending quarter.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for Kraft Heinzthis earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Kraft Heinzcarries a Zacks Rank #3, its Earnings ESP of -0.80% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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