Kraft Heinz fail leaves Buffett and 3G well fed

23 February, 2019, 03:37 | Author: Regina Silva
  • Heinz tomato ketchup of U.S. food company Kraft Heinz are offered at a supermarket of Swiss retail group Coop in Zumikon

It also flagged to investors in its quarterly results a subpoena it received past year from the U.S. Securities and Exchange Commission related to its procurement practices. Those operations handle interactions with outside suppliers.

As for the SEC investigation, Kraft Heinz said the subpoena prompted it to launch its own review, which resulted in a $25 million charge for expenses that should have been accounted for previously.

The steep write-down and loss in the quarter is a devastating recognition that efforts to change the trajectory of the company have not been as successful as once thought.

Kraft Heinz, like others in the industry, is facing increased competition from less expensive, retailer brands, as well as growing consumer preference for non-processed food.

Families, particularly in the US, have pivoted sharply away from processed foods and toward more simple and fresh ingredients.

Shares of Kraft Heinz fell 27% in early trading.

Warren Buffett will release his widely anticipated annual letter to Berkshire Hathaway shareholders on Saturday, the same day that the sprawling conglomerate will report its quarterly earnings.

It has cut costs aggressively, but it appears that the effect has not been what was expected.

"We have been bullish on KHC for its role as a likely consolidator in packaged food, but now believe we likely were overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company", Piper Jaffray analyst Michael Lavery said in a client note Friday.

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On Friday, Barclays' analyst Jay Gelb lowered estimates for Berkshire Hathaway's Q4 EPS to $1,726 from $3,522 per A share and to $1.15 from $2.35 per B share.

Two years later, Kraft Heinz tried and failed to acquire Unilever for $143 billion in a deal that might have allowed it to continue cutting costs and increasing margins, analysts said.

"The weak underlying performance of the business and the continued need to reinvest back into the business likely keeps the company from pursuing consolidation any time soon", Growe said.

Under 3G, Kraft Heinz embraced zero-based budgeting, a cost-conscious strategy meant to improve operating margins that requires managers to justify all expenses, from pencils to forklifts.

"Investors for years have asked if 3G's extreme belt-tightening model ultimately would result in brand equity erosion", JPMorgan analyst Ken Goldman said.

"We think the answer arguably came yesterday in the form of a $15 billion intangible asset write-down for the Kraft and Oscar Mayer brands", said Goldman, who cut his rating to "neutral" from "overweight". Its overall global sales also edged up, but its profit when excluding one-time charges still fell short of Wall Street expectations.

The firm's shares, which have been sliding for about two years, fell below $35 Friday.

Going forward, Kraft Heinz will award shareholders with a dividend of 40 cents each quarter, a marked drop from the 63 cents it paid out prior.

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