By Heather Haddon
Kraft Heinz Co. reported falling sales and wrote down the value
of its brands again, reflecting operational missteps as well as the
enormous pressure on food giants to improve their products as
consumers gravitate to newer alternatives.
Chicago-based Kraft Heinz said on Thursday that it had booked
charges reducing the values of its assets by $1.22 billion for the
first six months of its fiscal year. That included $744 million
related to businesses including international divisions and its
U.S. refrigerated foods unit, along with $474 million in declining
value reflecting the company's lower stock price.
"We've been too focused on the present and literally on
firefighting," Chief Executive Miguel Patricio told investors on a
call. "We need to work on our competencies for the future."
Kraft Heinz's shares fell 14% to below $27. The stock is down
38% this year.
Big food makers are trying to improve their products and add new
brands as consumers gravitate toward foods they perceive as fresher
and healthier. General Mills Inc., Kellogg Co. and Campbell Soup
Co. are some of the companies that have seen sales suffer in recent
years as customers eschew their cereals, soups and other packaged
foods. They have also been hit by competition from private-label
products and higher costs for ingredients and other inputs.
Kraft Heinz, one of the world's largest packaged food makers,
has been hit harder than most. Some former employees and suppliers
say the company's cost-cutting drive left well-known brands too
diminished to compete. Kraft Heinz also hasn't acquired smaller
brands more focused on healthfulness or natural ingredients or
updated its products to the same degree as some competitors.
Kraft Heinz in February wrote down the value of its Oscar Mayer
and Kraft Heinz brands by $15.4 billion and slashed its dividend.
The food giant said in June that Velveeta, Cool Whip, A1 steak
sauce and many other brands could also face downward revisions if
sales continue to deteriorate.
The maker of Oscar Mayer hot dogs, Heinz ketchup and Kraft
macaroni and cheese said its net sales fell 5% in the first half of
this year compared with the first two quarters of 2018 to $12.37
billion. Organic sales, which exclude currency fluctuations and the
impact of deals, dropped about 2%.
Weaker sales in the U.S. reflected lower prices that Kraft Heinz
implemented for some products in an effort to gain market share and
reflect lower prices for some ingredients, including nuts and
coffee, the company said. Other food makers, including Mondelez
International Inc. and Hershey Co., posted strong sales in the
latest quarter after raising prices.
Mr. Patricio said the company hasn't done enough to advertise
its brands to potential new consumers, such as Hispanic customers.
It also needs to do more to come up with products for international
markets, such as condiments in China, he said.
Kraft Heinz had delayed the release of its results for the first
half of the year, and said it would continue delaying filings
associated with that period as it considers further write-downs on
the value of its brands.
Mr. Patricio said the company would stop offering forecasts for
its future earnings as it sorts out its problems.
"We have a big agenda to build," Mr. Patricio said. "I think
that working on short-term targets will not help."
Kraft Heinz belatedly released its full-year 2018 financial
results in June after completing an internal investigation into
accounting misstatements by employees. The irregularities
understated the costs of goods sold across roughly three years by
$208 million, an amount that Kraft Heinz said wasn't material to
its revenue of around $26 billion annually. The company continues
to face a federal probe into its accounting practices and lawsuits
alleging insider trading by executives and top shareholders.
Mr. Patricio, a former Anheuser-Busch InBev SA executive who
took over at Kraft Heinz in June, is tasked with bringing the
company back from its biggest crisis since investment fund 3G
Capital LLC and Warren Buffett helped broker the merger of Kraft
Foods with H.J. Heinz in 2015.
Mr. Buffett said earlier this year that he overpaid for Kraft
Heinz but didn't plan to sell his 27% stake. Berkshire Hathaway
Inc. reported upbeat earnings last week, though those results
didn't include Kraft Heinz because of the food company's delayed
financial disclosure.
Kraft Heinz has tried to shed some of its weakest brands to
reduce debt. But the company has struggled to find bidders for old
brands such as Maxwell House, according to people familiar with
those discussions. Mr. Patricio has said he would put attempted
sales on hold until he gets a better sense of the company.
3G is known for its zero-base budgeting approach through which a
company justifies all of its spending each year. Some former
employees and suppliers say Kraft relied too much on that approach,
leaving its brands starved of innovation as the company boosted
profits early after the merger.
Mr. Patricio Thursday defended zero-base budgeting, but said the
company's brands needed more investment.
"Our brands are icons. It's our job to ensure they are living
icons," Mr. Patricio told investors.
Kraft Heinz has introduced new products and marketing campaigns
in recent months to boost sales. It launched a new line of frozen
meals co-branded with Oprah Winfrey last week, and recently listed
the Oscar Mayer Wienermobile as a place to stay on Airbnb Inc.
Kraft is seeing sales declines in big categories that include
coffee and cheese in the year through July 13, according to a UBS
market analysis.
Kraft Heinz executives said Thursday that sales suffered after
retailers reduced their inventories during the year.
Net income for the six-month period fell to $854 million, or 70
cents a share, from $1.76 billion, or $1.43 a share, during the
comparable period last year.
--Micah Maidenberg contributed to this article.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
August 08, 2019 11:53 ET (15:53 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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