Kraft Heinz (KHC -0.55%) stock underperformed the market last year, declining 9% in 2023 compared to a 24% rally in the S&P 500. That slump wasn't unusual for the consumer-packaged foods industry, though. Peers including PepsiCo and McCormick also sat out of the wider market's rally as Wall Street turned its attention back toward high-growth tech stocks.
Kraft Heinz shares were pressured by stubborn growth challenges and a weakening sales outlook for the 2023 fiscal year.
Lowering expectations
Kraft Heinz raised its earnings outlook at the company's last quarterly update in early November. But that good news was outweighed by concerns around sales trends. The company reported just a 2% organic sales uptick for the period that ran through late September.
Worse yet, that growth came entirely from rising prices. Kraft Heinz reported a 6% volume drop in the core U.S. market and a 4% decline internationally. That's a worse performance than investors saw from PepsiCo, which recently announced a healthy 9% organic sales increase for the fiscal third quarter.
Kraft's management sought to stress a few positive aspects around the company's operating and financial trends. Cost cuts are boosting profit margins, for example, and free cash flow is solidly positive. Kraft Heinz also made progress paying down its debt this past year, which has been a major financial goal for executives. These wins should make it easier to boost earnings and profitability in 2024 and beyond.
Looking ahead
Yet the short-term outlook remains muted around growth. Kraft Heinz now sees organic sales landing near the low end of its 2023 guidance range calling for gains of between 4% and 6%. This uptick seems sure to come mostly from rising prices as well, given consumers' cautious spending habits in response to inflation.
As a result, Kraft Heinz doesn't appear to have many options available to it in management's bid to accelerate sales growth over the coming quarters. The good news is that investors should see improving financial results thanks to rising profit margins and a falling debt burden.
But Wall Street won't really get excited about this business until Kraft Heinz can show faster organic sales growth that comes from a healthy mix of rising prices and increased volumes. Keep this stock on your watch list, then, until there are more concrete signs of accelerating sales volume trends.
