Company Reports

Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. But we attribute recent performance to its revamped road map, as evidenced by its share position and recent shelf space gains, rather than being merely a byproduct of the macro and competitive backdrop. Since mid-2019, Kraft Heinz has prioritized the pursuit of efficiencies that prove lasting, brand spending elevation (marketing and product innovation), enhancement of capabilities (category management and e-commerce), and scale leverage to more nimbly respond to changing market conditions, which we perceive as prudent.

The market soured on no-moat Kraft Heinz following mixed fourth-quarter marks, sending shares down by a mid-single-digit percentage. While its adjusted gross margin popped 260 basis points to 34.8%, organic sales slipped 0.7% on a 4.4% degradation in volume. This shortfall was particularly acute on its home turf (around three quarters of its total sales), where organic sales fell 3% on a 5.5% downdraft in volumes. Beyond a few one-time factors (related to trade timing and retail inventories, which compressed sales by 150 basis points), management was also forthright that consumers are struggling under the weight of higher interest rates and a reduction in SNAP benefits.

Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. But we attribute recent performance to the prudence of its revamped road map (based on household penetration and repeat purchase metrics) rather than merely a byproduct of the macro and competitive backdrop. In this context, since mid-2019, Kraft Heinz has prioritized the pursuit of efficiencies that prove lasting, brand spending elevation (marketing and product innovation), the enhancement of capabilities (category management and e-commerce), and scale leverage to more nimbly respond to changing market conditions, which we perceive as prudent.

Even though the sun is setting on CEO Miguel Patricio’s time at the helm of no-moat Kraft Heinz, we surmise the imprint he is leaving on the business will persist. Before he came on board, Kraft Heinz was plagued by its outsize desire to root out costs blindly in favor of juicing near-term sales and cash flows, without any regard for investing to support the long-term health of the business. In stark contrast, Kraft Heinz’s third-quarter results (1.7% organic sales growth, nearly 400 basis points of expansion in the adjusted gross margin to 34%, and a 280-basis-point jolt in the adjusted operating margin to 17.7%) came in spite of a 25% increase in marketing expense, an 8% bump in research and development expense, and a 24% increase in technology spending. And we think management is keen to unearth further cost savings to boost spending behind its brands and capabilities, with incoming CEO Carlos Abrams-Rivera (one of the architects of this playbook) set to take the reins.

Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. But we attribute recent performance to the prudence of its revamped road map (based on household penetration and repeat purchase metrics) rather than merely a byproduct of the macro and competitive backdrop. CEO Miguel Patricio has charged the firm to pursue efficiencies that prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as prudent.

After nearly five years at the helm, no-moat Kraft Heinz announced CEO Miguel Patricio will step down in January, with Carlos Abrams-Rivera—who joined the firm in 2020 and currently serves as executive vice president and president of North America—poised to take the reins. Patricio will continue to serve as executive chairman to ensure a smooth transition. Abrams-Rivera boasts an extensive career in the consumer packaged goods industry, with time spent at wide-moats Campbell Soup and Mondelez, and strikes us as a sound fit for the role. And because he has been intimately involved in scripting and executing the firm’s strategic playbook (anchored in upping the ante on brand spending and bolstering its category management and e-commerce capabilities), we don’t expect Kraft Heinz will veer off its current course under his watch. Our Standard capital allocation rating remains in place.

Despite headwinds, sales continued to climb in no-moat Kraft Heinz’s second quarter, up 4% on an organic basis on top of 10% growth a year ago. Adjusted gross and operating margins expanded 180 and 90 basis points, respectively, to 33.3% and 20.6%. Pricing was a major driver of the performance, serving as an 11% benefit to the top line. However, we don’t think management is focused only on raising prices. Rather, we attribute recent marks to the strategic playbook that CEO Miguel Patricio crafted upon taking the helm in 2019, anchored in extracting inefficiencies from the business (with a target of unlocking $500 million per year) to juice brand investments. We view this course as sound and believe it has enabled Kraft Heinz to regain acclaim from retailers and consumers alike after years of underinvestment and executional missteps.

Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. But we attribute recent performance to the prudence of its revamped road map (based on household penetration and repeat purchase metrics) rather than merely a byproduct of the macro environment. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

Kraft Heinz adeptly withstood commodity, transportation, and logistics inflation as well as lingering supply chain angst, as evidenced by solid first-quarter marks that sent shares up at a mid-single-digit percentage clip. Organic sales popped 9.4%, while adjusted gross and operating margins expanded 130 and 90 basis points, respectively, to 32.8% and 19.5%. Higher prices at the shelf were once again a major contributor, serving as a nearly 15% benefit to the top line, as volumes retreated 5.3% (still modest relative to the level of price hikes passed through).

Like its peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel, and could again if consumers resort to at-home food consumption against a more challenging economic backdrop. But if household penetration and repeat purchases are a guide, we posit its revamped road map is proving prudent. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

We don’t expect any material change to our $52 fair value estimate for no-moat Kraft Heinz after digesting solid fourth-quarter marks of 10.4% organic sales growth, 60 basis points of degradation in the adjusted gross margin to 32.2%, and a 20-basis-point shortfall in its adjusted operating margin to 20.3%. While the market has taken a more somber view (with shares holding flat), we think Kraft Heinz should be on investors’ shopping list, trading at a 25% discount to our intrinsic valuation while offering a 4% dividend yield.

Like its peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel, and could again if consumers resort to at-home food consumption against a more challenging economic backdrop. If household penetration and repeat purchases are a guide, we posit its revamped road map is proving prudent. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that will prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

Like its peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel, and could again if consumers resort to at-home food consumption against a more challenging economic backdrop. If household penetration and repeat purchases are a guide, we posit its revamped road map is proving prudent. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that will prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

Although the market continues to snub Kraft Heinz (with the stock price about flat), we think this move is unjustified given its stout 11.6% third-quarter organic sales growth, up 6.4% relative to the third quarter of 2019. We acknowledge the level of pricing that Kraft Heinz has put through is massive (15.4% on a consolidated basis, including 15.3% in North America), though the volume response is striking (down just 3.8% and 4.4%, respectively). From our vantage point, these results evidence the prudence of the strategic playbook CEO Miguel Patricio inked when he took the helm in 2019, prioritizing brand (marketing and product innovation) and capability (category management and e-commerce) investments, an approach that has merit even once current dynamics (the pandemic, macro challenges, inflation, supply chain hurdles) are put to rest. And we posit spending to bolster the long-term health of the business will continue to take top billing, with our forecast calling for Kraft Heinz to direct 6% of sales ($1.7 billion) annually to such areas.

Like its peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel, and could again if consumers resort to at-home food consumption against a more challenging economic backdrop. And if household penetration and repeat purchases are a guide, we posit its revamped road map is proving prudent. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that will prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

Like its peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel, and could again if consumers resort to at-home food consumption against a more challenging economic backdrop. And if household penetration and repeat purchases are a guide, we posit its revamped road map is proving prudent. In this context, CEO Miguel Patricio has charged the firm to pursue efficiencies that will prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

The market sent no-moat Kraft Heinz's shares down roughly 8% following second-quarter results, reflecting the negative effects of inflation, but we believe this reaction is shortsighted, leaving investors an opportunity to stock up at a 30% discount. Organic sales growth accelerated (to 10.1%, an improvement from 6.8% in the first quarter), though the burden from commodity and supply chain costs also swelled, driving a 270-basis-point erosion in adjusted operating margin to 19.7%. It’s unlikely these cost headwinds will abate in the near term, with management now expecting a high-teens percentage impact in fiscal 2022, up from the midteens three months ago. But in our view, Kraft Heinz is employing multiple tactics—such as surgically raising prices, extracting inefficiencies with the aim to realize $400 million in savings this year, and revenue growth management—that will blunt the hit to profits longer term.

Kraft Heinz disclosed May 26 that 3G Capital (it second-largest stockholder next to wide-moat Berkshire Hathaway, which maintains around a 25% stake) has distributed about half of its shares to external investors in its funds, leaving it with an 8% position. This news doesn’t shake our stance regarding the prudence of the firm’s current strategic playbook—anchored in pursuing lasting efficiencies, elevating research, development, and marketing spending, enhancing its category and e-commerce capabilities. As well, it leverages its scale to more nimbly respond to changing market conditions and its financial prospects (2% average annual sales growth against operating margins holding in the low-20s). As such, we aren’t wavering on our $51 fair value estimate.

Like its packaged food peers, Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. However, we also surmise the firm is realizing improved relevance with consumers, with management citing household penetration and repeat purchases edging higher since its revamped road map was put in place. More specifically, CEO Miguel Patricio has charged the firm to pursue efficiencies that will prove lasting, elevate brand spending (marketing and product innovation), enhance capabilities (category management and e-commerce), and leverage its scale to more nimbly respond to changing market conditions, which we perceive as judicious.

Heading into no-moat Kraft Heinz’s first-quarter report, the chief question was how volumes fared against the backdrop of pronounced price hikes. In our view, a mere 2% retraction in volumes against a 9% price increase suggests the strategic playbook CEO Miguel Patricio cooked up nearly three years ago (centered on upping the ante on brand spending and bolstering its category management and e-commerce capabilities) is proving an enticing recipe. Profits didn’t hold up quite as well, though, and inflation seems unlikely to abate; management now expects a midteens hit from higher input costs in fiscal 2022, up from low-teens prior. In this context, the adjusted gross margin slipped 250 basis points to 31.9% in the quarter, and the adjusted operating margin contracted 260 basis points to 18.6%.