In some ways, its hard to imagine how a pantry brand powerhouse like Kraft Heinz (NASDAQ:KHC) could have wound up in this position, but here we are: Falling sales, lagging popularity, and a shift in consumer tastes toward fresher, healthier food have been cutting the growth right out of the company, and that trend continued last quarter.
In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Ron Gross, Matt Argersinger, and Jason Moser talk about its headwinds, its guidance, and what the company is doing to catch up to the trends.
A full transcript follows the video.
This video was recorded on Nov. 2, 2018.
Chris Hill: A bad year for Kraft Heinz just got a little bit worse. Third-quarter sales came in lower than expected. Shares of Kraft Heinz falling on Friday, Ron, and hitting a new 52-week low.
Ron Gross: They have really been struggling with the trend toward fresher, healthier, more natural foods. It's showing up in the numbers. They did manage to eke out an overall revenue increase of 1.6%, but they have higher costs -- marketing, hiring, new product costs really are weighing on that income statement. Their adjusted EBITDA was down 16% in the U.S., which is obviously very important to them. Adjusted earnings fell 6%.
They're guiding us to expect some relief from some of these cost pressures. I think we have to wait to see how that plays out. You have top-line weakness, you've got pressure on margins. Never leads to goodness on the bottom line. We'll have to take this quarter by quarter, but I don't see this abating anytime soon.
Hill: Yeah. And Jason, when you look at what the stock is doing, I don't personally feel any pressure to jump in here.
Jason Moser: No. I don't think I'd ever feel any pressure to jump in there. Correct me if I'm wrong, was it Berkshire that made a big investment in Kraft?
Gross: You're correct.
Moser: They're probably sitting there thinking, "I should have listened to those guys from Motley Fool Money and invested in McCormick instead," because McCormick and French's and Frank's Red Hot, those things are just on fire, baby!
Matt Argersinger: Whoa! Yeah, I think the problem with Kraft and others is that the importance that consumers used to place on those brands, and the marketing budgets that companies like Kraft could put behind those brands, it's no longer that important anymore in the FMCG -- fast-moving consumer goods -- category that's in vogue right now. And that's just because with consumers, it's more about efficiency and delivery and things like that. Generic brands and others seem to fit that just fine. They're not really distinguishing between brands anymore.
Gross: Right. The Kraft Heinz merger, I think, made sense. They were able to squeeze out about $1.8 billion of costs there. That made sense. But now, where do you go from here? You have to get on the right trends or you're going to continue to suffer.
Moser: What was that thing I saw the other day -- millennials are apparently killing American cheese? Did anybody else see that?
Gross: [laughs] No, I don't even know what that means.
Argersinger: It makes sense!
Moser: Google it. I swear I saw it!
Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of McCormick. Matthew Argersinger has no position in any of the stocks mentioned. Ron Gross owns shares of Berkshire Hathaway (B shares). The Motley Fool recommends Berkshire Hathaway (B shares) and McCormick. The Motley Fool has a disclosure policy.