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Kraft Heinz (NASDAQ:KHC) Reports Sales Below Analyst Estimates In Q4 Earnings


Full Report / February 14, 2024

Packaged foods company Kraft Heinz (NASDAQ:KHC) missed analysts' expectations in Q4 FY2023, with revenue down 7.1% year on year to $6.86 billion. It made a non-GAAP profit of $0.78 per share, down from its profit of $0.85 per share in the same quarter last year.

Kraft Heinz (KHC) Q4 FY2023 Highlights:

  • Revenue: $6.86 billion vs analyst estimates of $6.98 billion (1.8% miss)
  • EPS (non-GAAP): $0.78 vs analyst estimates of $0.77 (1.4% beat)
  • Guidance for full year 2024 EPS (non-GAAP): $3.04 at the midpoint vs analyst estimates of $3.02 (0.7% beat)
  • Free Cash Flow of $1.12 billion, up 46.7% from the previous quarter
  • Gross Margin (GAAP): 33.8%, up from 32.2% in the same quarter last year (miss vs. expectations of 34.3%)
  • Organic Revenue was down 0.7% year on year (miss vs. expectations of up 0.5% year on year)
  • Sales Volumes were down 4.4% year on year
  • Market Capitalization: $44.31 billion

The result of a 2015 mega-merger between Kraft and Heinz, Kraft Heinz (NASDAQ:KHC) is a packaged foods giant whose products span coffee to cheese to packaged meat.

Kraft was founded in 1903 as a business purchasing wholesale cheese and selling it to small stores in Chicago. The company revolutionized the dairy industry in 1916 when it patented a method for processing cheese that extended its shelf life, resulting in processed cheese. H.J. Heinz was founded in 1869 with horseradish as its first product. The company subsequently launched its tomato ketchup, which became known worldwide.

In addition to its namesake brands, the portfolio today features Oscar Meyer (hot dogs and other meats), Maxwell House (coffee), Velveeta (cheese), Philadelphia (cream cheese), and Capri Sun (juice), among many others. With these brands, Kraft Heinz caters to middle-income households seeking convenience. Customers who rely on these brands are usually busy and don’t have the time to cook meals or prepare snacks from scratch for themselves and their families.

Kraft Heinz products are sold by nearly every retailer that carries food, snacks, and drinks. The largest supermarkets to your corner deli or bodega will usually sell Kraft singles or Heinz ketchup. Given the company’s brand recognition and scale, Kraft Heinz often enjoys prominent placement on retailer shelves since their brands reliably drive foot traffic.

Packaged Food

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences.The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors in packaged food with diverse brand portfolios include Mondelez (NASDAQ:MDLZ), Campbell Soup (NYSE:CPB), General Mills (NYSE:GIS), and Nestle (SWX:NESN).

Sales Growth

Kraft Heinz is one of the most widely recognized consumer staples companies in the world. Its influence over consumers gives it extremely high negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don't have).

As you can see below, the company's revenue was flat over the last three years as consumers bought slightly less of its products. We'll explore what this means in the "Volume Growth" section.

Kraft Heinz Total Revenue

This quarter, Kraft Heinz missed Wall Street's estimates and reported a rather uninspiring 7.1% year-on-year revenue decline, generating $6.86 billion in revenue. Looking ahead, Wall Street expects sales to grow 1.2% over the next 12 months, an acceleration from this quarter.

Volume Growth

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether Kraft Heinz generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, Kraft Heinz's average quarterly sales volumes have shrunk by 2.7%. This decrease isn't ideal as the quantity demanded for consumer staples products is typically stable. Luckily, Kraft Heinz was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 6.7% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren't sustainable over the long term unless the business is really really special. Kraft Heinz Year-On-Year Volume Growth

In Kraft Heinz's Q4 2023, sales volumes dropped 4.4% year on year. This result was a further deceleration from the 4.8% year-on-year decline it posted 12 months ago, showing the business is struggling to push its products.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.

Kraft Heinz's gross profit margin came in at 33.8% this quarter, up 1.6 percentage points year on year. That means for every $1 in revenue, $0.66 went towards paying for raw materials, production of goods, and distribution expenses. Kraft Heinz Gross Margin (GAAP)

Kraft Heinz's unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 32.4% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 8.7% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

This quarter, Kraft Heinz generated an operating profit margin of 19%, up 2.3 percentage points year on year. This increase was encouraging, and we can infer Kraft Heinz was more efficient with its expenses because its operating margin expanded more than its gross margin.

Kraft Heinz Operating Margin (GAAP)

note: Q4'18 suffered from an impairment charge

Zooming out, Kraft Heinz has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer staples business, producing an average operating margin of 15.4%. On top of that, its margin has improved by 3.4 percentage points on average over the last year, a great sign for shareholders.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, Kraft Heinz reported EPS at $0.78, down from $0.85 in the same quarter a year ago. This print beat Wall Street's estimates by 1.4%.

Kraft Heinz EPS (Adjusted)

Between FY2020 and FY2023, Kraft Heinz's EPS grew 3.3%, translating into an unimpressive 1.1% compounded annual growth rate. This growth, however, is materially higher than its revenue growth over the same period, showing that Kraft Heinz has excelled in managing its expenses.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 1.4% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Kraft Heinz's free cash flow came in at $1.12 billion in Q4, up 68% year on year. This result represents a 16.4% margin.

Kraft Heinz Free Cash Flow Margin

Over the last eight quarters, Kraft Heinz has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 8.4%, above the broader consumer staples sector. Furthermore, its margin has averaged year-on-year increases of 5.3 percentage points over the last 12 months. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Kraft Heinz's five-year average ROIC was 3.8%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Kraft Heinz's ROIC averaged a 2.5 percentage point increase each year. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from Kraft Heinz's Q4 Results

The company's organic revenue unfortunately missed analysts' expectations, leading to a total revenue miss. Gross margin also came in below expectations. With regards to guidance, full year EPS is projected to be slightly above Wall Street Consensus estimates. Overall, the results were mixed. The stock is flat after reporting and currently trades at $36.14 per share.

Is Now The Time?

Kraft Heinz may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Kraft Heinz, we'll be cheering from the sidelines. Its revenue growth has been weak over the last three years, but at least growth is expected to increase in the short term. And while its scale gives it immense negotiating leverage with retailers, the downside is its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its shrinking sales volumes suggest it'll need to change its strategy to succeed.

Kraft Heinz's price-to-earnings ratio based on the next 12 months is 12.0x. While the price is reasonable and there are some things to like about Kraft Heinz, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $40.20 per share right before these results (compared to the current share price of $36.14).

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