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The recently-formed Kraft Heinz Co. (NASDAQ: KHC), the result of a major merger between two giants in the food industry, released its third-quarter earnings report on Thursday after the market close.
Unfortunately, the results did not meet analyst expectations. Investors responded harshly by selling the stock down 4.5% in Friday trading.
Each company has undergone a massive transformation to join forces and become a global food and beverage powerhouse. There are typically bumps in the road when two huge companies merge, and Kraft Heinz is no exception.
Long term, the benefits of the merger are clear. But in the short term, investors should brace themselves for volatility.
Earnings Leave Investors Hungry
Kraft Heinz swung to a $303 million loss last quarter. This was far worse than the $8 million loss reported in the same quarter last year.
On an adjusted basis, stripping out one-time items, Kraft Heinz earned $0.44 per share in profit last quarter. That widely missed analyst expectations, which called for $0.62 per share. Total pro-forma revenue clocked in at $6.4 billion. This also failed to meet estimates, which were for $6.7 billion. Organic net revenue, which excludes the effects of foreign exchange, fell 2%.
The key reasons for the poor results were weak sales of ready-to-drink beverages, food service, cheese and boxed dinners in North America.
In the aftermath of the disappointing Kraft Heinz earnings report, the company is severely cutting costs and slashing 2,600 jobs in the U.S. and Canada. On the conference call with analysts, management said the company will also initiate a zero-based budgeting policy, in which it uses a tool that justifies expenses for each new period, across the new company.
This should not come as a surprise, since Heinz was financially backed by private-equity firm 3G Capital, which has a reputation in the industry for investing in companies and then pursuing major cost cuts. In all, Kraft Heinz believes it can eliminate $1.5 billion in annual expenses by the end of 2017.
Kraft Heinz: A Force to be Reckoned With
The rationale for Kraft and Heinz joining forces was fairly straightforward, that it would create a massive conglomerate in the food industry. The new entity brings together two of the most iconic brands in the world. Kraft Heinz’s products include its namesake Kraft and Heinz lineup, as well as Oscar Mayer, Velveeta, Planters, Kool-Aid, Ore-Ida and many more.
Kraft Heinz is now a $29 billion company by annual sales. The company states it is now the No. 3 food and beverage company in North America, and No. 5 in the world. It has a huge portfolio of more than 200 brands, operating in operates in nearly 200 countries around the world, and holds eight brands that each collect at least $1 billion in annual sales.
The new company is huge, and when companies this large join forces, they are typically able to squeeze out a significant amount of costs. Thanks to cost synergies from the merger, as well as economies of scale, Kraft Heinz should at least begin to reverse its losses in future quarters.
Dividend Increase Helps Ease the Pain
The weak Kraft Heinz earnings report was a disappointment to investors, but not all the news was bad. Along with its results, the company increased its dividend by 4%, to $2.30 per share annually. The stock provides a 3.2% dividend yield, which makes Kraft Heinz a good pick for dividends.
Still, management will need to execute on its cost savings priorities in order to grow earnings going forward. It has reassured investors that it has a clear plan to accomplish this. Only time will tell.
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