Kraft Heinz (NASDAQ:KHC) will report its fourth-quarter financial results before the market opens on Friday, Feb. 16. It's been a tough year for the food giant, with weak sales growth amid shifting consumer tastes and competition from private-label brands.
The fourth-quarter earnings release will tell us more about whether management's strategy is improving top-line growth. Here's what investors need to watch.
Guidance and recent sales trend
As of the third quarter, Kraft's organic net sales year to date -- excluding currency changes and costs related to the 2015 merger -- declined 1.1%, as the maker of Oscar Mayer hot dogs and many other popular brands continues to deal with consumer demand shifting away from heavily processed foods.
Kraft started the year with a decline of 2.7% in organic sales during the first quarter. Management has spent the year focused on its strategic pillars of innovation, marketing, and cost savings; those helped Kraft improve to the point where it was able to report positive organic sales growth of 0.3% in the third quarter.
Management hopes to build on recent momentum and deliver solid results for Q4, but there are still headwinds to fight through. Within the U.S. region -- which made up 70% of total organic net sales through the first three quarters of 2017 -- hurricane-related costs, production delays in its cold-cuts business, and a tough comparable with the year-ago quarter are expected to cut about 40 basis points off sales growth for the quarter.
As for the bottom line, the company expects its cost-savings initiatives and focus on profitability to deliver "solid" growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Management believes a more favorable balance between product pricing and costs will help improve earnings growth in Q4 for the U.S. region.
Kraft Heinz expects to deliver adjusted earnings per share growth for Q4, but doesn't provide specific earnings guidance. The consensus analyst estimate is that the food giant will report adjusted earnings per share of $0.96, representing year-over-year growth of 5.5% for the quarter. That should translate to $3.61 in adjusted earnings per share for the full year, according to analysts, or growth of 8.4% over 2016.
Kraft Heinz's strategy shows promise
There are a lot of moving variables quarter to quarter; pricing, volume and mix, and commodity cost all affect sales performance. With that in mind, investors should listen particularly to management's comments on the underlying trends shaping the company's performance, and about how innovation and marketing will help position the company for long-term growth.
Lately, management has been reporting that the company is beginning to see benefits from shifting capital to its best growth opportunities, particularly in sauces and condiments. Total organic net sales growth improved to positive for the first time during 2017 in Q3. This is a result of investments in innovation, and of filling food categories where Kraft hasn't had a presence before, including frozen meals in the U.S. The company also introduced the Planters brand in China.
More improvement on the top line is expected as the company invests in processes to launch new products faster, and in gathering better data about its customers so it can deliver the right brands at the right price. These initiatives are also management's answer to softening demand for processed foods.
Demand has been particularly soft for Kraft's cold cuts, natural cheeses, and dressings. This has been offset by growth in sauces, condiments, and Lunchables. Management has reported that the problems in cold cuts and cheeses are "fixable," so investors will want to listen for updates on how those efforts are going.
Kraft Heinz is controlled by 3G Capital, a Brazilian investment firm known for aggressive cost-cutting. Management is still finding areas to cut costs out of the supply chain, which helped EBITDA grow 6.7% year over year in Q3. Since the 2015 merger, the company has trimmed about 6% in costs as a percentage of annual sales, which has helped earnings grow faster than the top line.
Will 2018 be better than 2017?
With a cost-cutter calling the shots, the bottom line should take care of itself over the long term. The key thing to watch is whether management's investments in innovation, marketing, e-commerce, and direct-to-market distribution will improve organic net sales growth. There's clearly been improvement recently, but more needs to be done to give investors confidence.
The stock is down about 14% over the last year, so expectations are not that high. Investors will be looking to see if management can deliver better top-line growth than what we've seen lately, coupled with a positive outlook for 2018.