Kraft Heinz Earnings: Price Increases Buoy Sales and Margins, but Market Share Languishes

Despite headwinds, sales continued to climb in no-moat Kraft Heinz’s KHC 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.

The picture isn’t entirely rosy, as Kraft Heinz lost 50 basis points of share in North America in the quarter to other branded operators that stepped up promotions, though private-label share held flat in its categories. With inflation moderating, supply chain disruptions being rectified, and consumers altering spending as pressures on their pocketbooks become more acute, we anticipated the competitive environment would intensify after years of lying idle. But we don’t believe Kraft Heinz is sitting still. We think it will continue putting resources behind consumer-valued innovation (up 10% in the quarter) and marketing (up 23%) while also enhancing its own capabilities to boost the agility of its operations. This aligns with our forecast for the firm to spend around 6% of sales, or $1.9 billion, annually on research, development, and marketing through fiscal 2032.

Taking this together, we see little to warrant amending our $53 fair value estimate. With the shares trading at a 30% discount to our intrinsic valuation and a 4%-plus dividend yield, we think investors should stock up.