Analyst Note| Erin Lash, CFA |
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.