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Could Kraft Heinz Stock See More Downside after Its 1Q18 Results?

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May. 3 2018, Published 7:39 p.m. ET

Challenges persist

Kraft Heinz (KHC) reported mixed 1Q18 results on May 2. As expected, Kraft Heinz’s organic sales marked a YoY (year-over-year) decline, reflecting lower volumes due to the persistent challenges in Planters and Ore-Ida as well as with retail inventory reductions in Canada. Plus, its net sales fell short of analysts’ expectations. The company’s 1Q18 sales included benefits from a shift in the timing of Easter to 1Q18 from 2Q18.

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Kraft Heinz’s bottom line saw some improvement and increased on a YoY basis, driven by the lower tax rate. However, significant cost inflation, primarily in commodities and freight, pressured its profitability. Lower volumes and increased investments in its growth initiatives also subdued its margins.

Going forward, the company’s sluggish sales and margin trends are likely to continue in 2Q18. Its management expects organic sales to take a hit from continued challenges in Planters and Ore-Ida. 

The growing share of private-label products in the cheese and cold cuts sector, as well as retail inventory reduction in Canada, is expected to hurt its organic sales. The shift in the timing of Easter to 1Q18 is expected to have an adverse impact of 1.0% in 2Q18.

Kraft Heinz’s profit margins are expected to remain low due to the anticipated decline in volume and mix, as well as inflation in raw material and freight costs. However, its management expects new product launches, cost savings, and business investments to drive sales and margins in 2H18.

Kraft Heinz underperformed its peers

Kraft Heinz (KHC) stock lost substantial value on a YTD (year-to-basis) basis on May 2, and it has underperformed most of its peers. Kraft Heinz stock is down ~30.3% on a YTD basis. 

Among its peers, General Mills (GIS), Hershey (HSY), Kellogg (K), and Campbell Soup (CPB) stock registered YTD declines of 28.3%, 21.1%, 16.7%, and 17.0%, respectively. Mondelēz (MDLZ), J.M. Smucker (SJM), and Conagra Brands (CAG) posted YTD declines of 11.5%, 8.4%, and 4.6%, respectively.

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