With 85% of its sales coming from traditional retail channels, Kraft Heinz has been taking advantage of the pandemic's preference for home-cooked meals to increase sales. In response to shifting market conditions, the company has redesigned its strategic roadmap, giving e-commerce, category management, brand spending, and efficiency top priority. With a target of $2.5 billion by the end of fiscal 2027, Kraft Heinz has saved $1.3 billion since the middle of 2019. Instead of increasing profits, this move is thought to be a means of freeing up resources to reinvest in its product mix.In order to counteract inflationary pressures associated with meats, dairy products, and coffee, the company has also been raising prices selectively. Kraft Heinz is concentrating on utilizing innovation and increasing marketing expenditures in spite of selective price hikes. About 3% of sales in fiscal 2024 came from innovation, and by fiscal 2027, management hopes to generate an additional $2 billion in net sales from new products. Its retail relationships and brand mix are supported by this approach. These efforts have also been facilitated by Kraft Heinz's decision to reduce the number of stock-keeping units it maintains in North America. Over the next ten years, the company is expected to spend about $1.6 billion a year on marketing, R&D, and development.
Kraft Heinz is one of those stocks that Buffett wants to "hold it forever. The last trade he ever made on this stock was back in 2015 where he increased the exposure by 0.1%. The stock comprises 4% of Buffett's portfolio, something in itself speaks volume about the fundamentals of the stock.
Investment Upsides
Since its merger in 2015, the North American food and beverage company Kraft Heinz has worked to establish a stable reputation among customers and merchants. With approximately $18 billion in domestic sales in 2024 and just under $26 billion in total worldwide sales, the company has been one of the biggest food and beverage companies in North America. However, the company's competitive advantage was lost in August 2018 as a result of the previous management team's preference for short-term cash flows and profitability over long-term business viability, which resulted in a rejection of brand investments. Its brands lost market share and shelf space at major retailers as a result of poor execution and innovation that couldn't keep up with changing consumer trends.
Following a management change in the middle of 2019, Kraft Heinz has been developing a new formula for success that emphasizes long-term efficiencies, increasing brand spending, improving capabilities, and using its size to react more quickly to shifting market conditions. In order to make sure that its products are in line with changing consumer trends and to strengthen its relationships with retailers, the company now spends an average of 1.2 billion dollars a year on research, development, and marketing. Regardless of the benefits of these investments, Kraft Heinz does not assert that increasing R&D, marketing, and/or capital expenditures is enough to turn the company around. Since fiscal 2020, Kraft Heinz's organic revenue has increased by 4% thanks to a 6% price boost and a slight 2% volume decline, which includes deliberate attempts to remove underperforming products from the mix. Kraft Heinz's top line increased by nearly 7% even after the recent period of sharp price increases in fiscal 2022 and 2023. This was because an average price increase of 11% was offset by an average volume decline of 4%.
Beyond its top-line marks, the benefits from its stepped-up spending have been reflected in improving market share positions. Kraft Heinz now controls more than 62% of the North American spreadable cheese aisle, with its Philadelphia brand up from 60% in 2019, as the firm has focused on moving to a cleaner ingredient lineup and moving its offerings beyond just a spread for bagels. Additionally, it has amassed about 55% share of the North American dried ready meals category (primarily with its namesake macaroni and cheese brand), around 350 basis points above its position five years ago. Additionally, the company maintains its dominant market share in North America for chilled lunch kits (more than 60%), cooking and table sauces (more than a fifth), and other condiments and sauces (roughly a third). It is deserving of a moat because of its dominant market shares, reaffirmed dedication to reinvesting in its brands, and size.
Intrinsic Valuation
Kraft Heinz Co: What to know about one of Warren Buffett's favourite stocks
Kraft Heinz is modestly undervalued with a target share price of $35,28. Management forecasts organic sales to fall by 2.5% to flat against adjusted EPS of $2.63-$2.74, with a fiscal 2025 enterprise value/adjusted EBITDA multiple of around 13 times. Macro pressures persist, with inflationary headwinds expected to continue this year at a 3% clip. However, a muted exposure to private label and enhanced agility in aligning with evolving consumer trends should mitigate any lasting downdraft in Kraft Heinz's margins. The company is expected to maintain a gross margin in the mid-30s this year, similar to the average generated in the five years preceding the pandemic.Notwithstanding the difficulties, Kraft Heinz increased its marketing, data and analytics, and R&D expenditures by 15% in the previous year. Its investments in its brands and capabilities have proven prudent, as evidenced by the 15% average net return from this spending. Top-line gains should be made possible by the company's strategic playbook, which is focused on boosting brand spending and strengthening its category management and e-commerce capabilities. In line with management's long-term goals of 2%3% organic sales growth and 6%8% adjusted EPS growth, the longer-term forecast predicts 2% average annual sales growth and an operating margin that remains in the low 20s.
Investment Downsides
The company has made strategic changes, such as increasing brand spending, bolstering category management and e-commerce capabilities, and lowering leverage, to withstand intense competition. Although inflation from logistics, labor, raw materials, and packaging is not entirely stifled, Kraft Heinz is well-positioned to combat these pressures. The company's increased exposure to private label and enhanced agility in aligning its mix with evolving consumer trends should blunt any lasting downdraft in Kraft Heinz's margins. The company also sees value in extracting inefficiencies, achieving savings of $1.3 billion in fiscal 2023-24 and a target of gross productivity savings of $2.5 billion through fiscal 2027.But there are still risks related to environmental, social, and governance issues, like having to recall its fare and having more regulatory oversight.
Portfolio Management
Kraft Heinz, a multinational food company, faced negative headlines following its fourth-quarter 2018 earnings announcement, a Securities and Exchange Commission investigation of its procurement accounting, and a reduction in its quarterly dividend. Interest has been raised about Kraft Heinz's propensity for deals, particularly now that leverage has dropped below its three-fold target. The company sold its nut business, which included the Planters brand, to Hormel for $3.35 billion and its natural, grated, cultured, and specialty cheese business to Lactalis for $3.2 billion. The company's nut business had a healthy three times fiscal 2020 sales and fifteen times adjusted EBITDA, while its natural cheese operations saw a respectable 1.8 times trailing 12-month sales and 12 times adjusted EBITDA.
