Kraft Heinz Misses Q3 Estimates As Lunchables Struggles

The Kraft Heinz Company reported lower-than-expected net sales and income as volume struggles and consumer demand for key brands continued to decline in its third quarter.

“While we continue to navigate near-term challenges, we firmly believe in our path forward,” said CEO Carlos Abrams-Rivera in prepared remarks.

The company’s top-line numbers exemplified those challenges. Net sales decreased to $6.3 billion during the quarter, a 2.8% decline from Q3 2023. Operating loss was $101 million, which compared to operating income of $653 million in the same period last year. Adjusted gross profit margin was 34.3% during the quarter.

“We acknowledge that we have quite a bit of work to do, and meaningful improvement will take some time,” Abrams-Rivera said.

One of the most glaring areas of improvement is Lunchables, which represented nearly 50% of the U.S. Retail sales decline in Q3 year-over-year. Company leadership attributed some of the slowdown to “negative publicity from a leading interest group” that has lingered longer than expected as well as an upstream supplier issue that has impacted an “important SKU.”

Defending Lunchables “number one market share is a top priority,” Abrams-Rivera said. The plan to turn it around includes “significant” investments in marketing and innovation to “engage both parents and kids” with the brand.

The company is also taking a similar approach of investment and innovation to bring Capri Sun and flagship Mac and Cheese back to incremental volume growth with signs of those brands beginning to improve.

On a positive note, Kraft Heinz expects to continue growth to its Global Away from Home channel. In Q3, the segment grew 1.8% driven by elevated distribution in higher-margin, non-commercial channels “beyond ketchup,” Abrams-Rivera said.

Emerging Markets was another bright spot in the earnings with net sales rising 4.9% with growth in both price and volume/mix. Kraft Heinz leadership emphasized this will balance overall growth as the company concentrates on bringing positive results from its U.S. Retail segment.

Company leadership did not address recent reports that Brazilian meatpacker JBS and Mexico’s Sigma Alimentos are bidding on Kraft Heinz’s planned divestment of the Oscar Mayer brand. The deal is rumored to fetch $3 billion, representing 10 times EBITDA.

Jefferies Equity Research noted that the divestment is necessary as Kraft Heinz is “too broad/diverse.” In a memo released this morning, Jefferies listed the company as a “hold” and said it will remain “softer for longer” as it missed Q3 sales and gross profit projections this morning.

On the back of these challenges, Kraft Heinz revised its guidance to be at the low end of its FY 2024 estimates. Organic net sales are forecast to be down 2% to flat with adjusted operating income up 1% to 3%.