Is KHC's Pricing Strategy Enough to Sustain Growth Amid Challenges?

The Kraft Heinz Company KHC is demonstrating resilience in a tough economic landscape thanks to its effective pricing strategies. In second-quarter 2024, KHC reported an adjusted gross profit of $2,296 million, up 2.5% year over year. The upside highlights the company's ability to maintain robust profit margins, even as inflationary pressures persist. With its adjusted gross margin expanding 210 basis points (bps) to 35.5%, the company is proving that it can navigate a challenging consumer environment while generating profits.

However, the company's growth is not without hurdles. In spite of bright spots in its three core segments — Foodservice, Emerging Markets and U.S. Retail Grow platforms — KHC is battling shifts in consumer behavior and declining demand for certain products. As we explore Kraft Heinz's strategies and challenges, it becomes clear that the company is at a critical juncture.

KHC Navigating Inflation and Boosting Margins

The ability to implement successful pricing strategies played a pivotal role in its performance. In the second quarter, the company's pricing moved up 1 percentage point, driven by higher pricing in the North America and Emerging Markets segments. Its focus on adjusting prices in response to rising input costs has paid off, as seen in its improved adjusted operating income — rising 2% to $1,380 million in the quarter. The uptick not only reflects the benefits of improved pricing but also projects KHC's proactive stance in managing costs.

KHC's strategic initiatives have also contributed to margin improvement. The introduction of its Agile@Scale program aims to enhance operational agility, resulting in a notable 190-bps increase in gross profit margin during the first half of 2024. By collaborating with technology partners and increasing research and development investments, KHC is poised to innovate and respond to evolving consumer preferences, particularly in the wellness and plant-based sectors.

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Expansion and Growth Opportunities for KHC

Kraft Heinz's growth strategy hinges on its three key segments. In North America, the ACCELERATE platforms are projected to achieve an annual growth rate of 4% over the next decade. Brands such as Heinz and Ore-Ida are driving this momentum through strategic investments and product innovations. Although challenges exist in Emerging Markets — most notable in China and Brazil — Kraft Heinz still managed to post high single-digit growth in the second quarter. In Global Away From Home, its plant resumed operations and the company is successfully expanding into new business areas and non-commercial channels.

The company's expansion efforts are also global. By bringing successful North American solutions to international markets, Kraft Heinz aims to capture a broader consumer base. Its commitment to innovation is evident in its product pipeline, which contributed to organic net sales. However, as consumer preferences shift, the company must remain agile to adapt to these trends.

Challenges Linger Amid Positive Developments

Despite its strategic advantages, Kraft Heinz faces several headwinds. The current consumer landscape is characterized by slow income growth and persistent inflation, factors that have dampened consumer sentiment. In fact, the company registered a 2.4% decline in organic net sales in the second quarter, thanks to lower demand for products like Lunchables.

The downturn is particularly pronounced in North America, where organic net sales fell 2.9%. Internationally, developed markets fared even worse, with a 3.9% decline. These results prompted the company to revise its expectations for organic net sales in 2024, now anticipating a decline of 2% to remain flat.

Volume Declines and Currency Risks Hurt KHC

Kraft Heinz's struggles extend beyond declining sales — the company also experienced a 3.4 percentage point decline in volume/mix in the second quarter, particularly in North America and developed markets. This trend raises concerns about the sustainability of profitability in the long run. KHC's extensive international operations expose it to risks from adverse currency fluctuations, which negatively impacted net sales by 1 percentage point in the second quarter.

Conclusion: A Critical Crossroads for Kraft Heinz

Kraft Heinz stands at a critical crossroads. While the company has demonstrated solid pricing strategies and maintained strong brand performance, significant challenges loom. The declining consumer demand and operational difficulties present hurdles that could impede future growth. As investors monitor Kraft Heinz's journey, it will be essential to watch how the company navigates these complexities and capitalizes on its strengths in the coming quarters. At present, Kraft Heinz carries a Zacks Rank of #3 (Hold).

KHC's stock has increased 9.6% in the past three months compared with the industry's 8.8% growth.

Some Better-Ranked Staple Bets

Here, we have highlighted three top-ranked food stocks — The Chef's Warehouse CHEF, Flowers Foods FLO and McCormick & Company, Inc.

The Chef's Warehouse, which distributes specialty food products, currently carries a Zacks Rank #2 (Buy).

CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef's Warehouse's current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.

Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2. FLO has a trailing four-quarter earnings surprise of 1.9%, on average. The Zacks Consensus Estimate for Flowers Foods' current financial-year sales and earnings implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.

McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for McCormick & Company's current fiscal-year sales and earnings indicates advancements of 0.2% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.

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