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Kraft Heinz faces pressure to do a deal as sales stagnate

May 5, 2017
Consumer Packaged Goods

Kraft Heinz, rebuffed in its bid to buy Unilever earlier this year, is struggling to reignite sales in the absence of a deal.

First-quarter revenue dropped to $6.36 billion, the food giant said yesterday. That missed the $6.46 billion average of analysts’ projections.

Earnings also fell short of estimates, suggesting that Kraft Heinz’s much-vaunted cost cutting didn’t do the job in the latest period.

The results crystallize many investor concerns about Kraft Heinz. The company and its backers, private-equity firm 3G Capital and Warren Buffett’s Berkshire Hathaway, have developed a reputation for acquiring companies and squeezing expenses. But they haven’t shown as much of a talent for expanding sales in a sluggish packaged-food industry.

“They need to show that they’re more than just a financial engineer—that they can run a food business in a challenging environment,” said Ken Shea, an analyst at Bloomberg Intelligence. “The jury is still out.”

The shares fell as much as 2.2 percent today. Kraft Heinz, which operates dual headquarters in Pittsburgh and Chicago, had been up 2.1 percent this year through yesterday’s close.

Kraft Heinz sales have now declined in four of the past five quarters, renewing concerns that the company needs to do another deal to keep growing. The maker of Velveeta cheese, Oscar Mayer hot dogs and its namesake ketchup generates about 70 percent of revenue in the U.S.—a market grappling with a broader industry slowdown—and its earnings gains have largely come from slashing thousands of jobs and eliminating other expenses.

But even the deep cuts failed to produce enough profit to satisfy Wall Street in the first quarter. Earnings amounted to 84 cents a share, excluding some items, short of the 85 cents predicted by analysts. Organic revenue, which excludes currency changes, fell 2.7 percent in the period.

The company was created in 2015 when Buffett and 3G orchestrated a merger between a business they already owned, H.J. Heinz, and the publicly held Kraft Foods.

3G’s managers had already improved profit margins at Heinz by squeezing budgets and shuttering factories, and then set about doing the same with the newly combined Kraft Heinz. They’re aiming to wring $1.7 billion in expenses out of the company by 2018.

Kraft Heinz looked as if it had found its next merger target earlier this year when the company bid $143 billion for Unilever. But the European consumer-products maker was cool to the offer amid concerns about a culture clash.

One issue, particularly in Europe, was whether Unilever’s focus on social consciousness and “brands with purpose” would survive the relentless cost cutting that has become the hallmark of 3G.

With that transaction off the table for now, Kraft Heinz may have to look within, Shea said.

“They need to fix what they have,” he said. “There’s more to running a business than just slashing costs.”

Source: Bloomberg via Chicago Business

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