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The Kraft Heinz Company KHC successfully implemented pricing strategies that have strengthened its performance and helped maintain robust profit margins despite ongoing inflationary pressures. The company continues to excel in its three key segments — Foodservice, Emerging Markets and U.S. Retail Grow platforms — despite challenges in the consumer environment. KHC is actively working on transforming its business to unlock its full potential and boost shareholder value.
Let’s delve deeper.
Positive Performance Boosts Kraft Heinz’s Margins
One of the key reasons for Kraft Heinz's resilience is its focus on effective pricing strategies. The company successfully managed to keep its second-quarter 2024 adjusted gross profit at $2,296 million, up from $2,239 million in the same quarter last year. It improved its quarterly adjusted gross margin by 210 basis points (bps) to 35.5%. This impressive performance reflects the success of pricing adjustments aimed at offsetting rising input costs. KHC’s adjusted operating income moved up 2% to $1,380 million in the second quarter, highlighting the benefits of reduced commodity and logistics expenses.
Transformation Drives KHC’s Future Growth
Kraft Heinz's three key segments also remain strong. The ACCELERATE platforms in North America, for example, are expected to register a robust annual growth rate of 4% over the next decade. Brands like Heinz and Ore-Ida are experiencing positive momentum, thanks to strategic investments and innovation. In Emerging Markets, while there were setbacks in countries like China and Brazil, the company still reported high single-digit growth in the second quarter.
The company is actively pursuing a transformation strategy aimed at unlocking its full potential. Since launching Agile@Scale in February 2022, it concentrated on enhancing its agility through partnerships with technology firms and innovative solutions. This approach resulted in a 190-bps increase in adjusted gross profit margin in the first half of 2024.
The AGILE@SCALE initiative is being expanded globally, introducing North American solutions to international markets. KHC is also ramping up its innovation efforts, significantly increasing its research and development investments. This commitment is evident in its innovation pipeline, which contributed 2.4% to organic net sales year to date. As consumer preferences shift toward wellness and plant-based products, the company is well-positioned to leverage its strong brand portfolio to meet these demands.
Kraft Heinz Facing Consumer Challenges
Despite these positive developments, Kraft Heinz is not without its challenges. The current consumer environment is marked by slower income growth and persistent inflation, which have dampened consumer sentiment. This has led to a decline in second-quarter organic net sales by 2.4% year over year, largely due to lower demand and disappointing sales for products like Lunchables.
In North America, the company saw a 2.9% decline in organic net sales, influenced by increased value-seeking behavior among consumers. Internationally, developed markets experienced a 3.9% drop in sales, exacerbated by lower prices in the U.K. and challenges in customer negotiations. Considering these factors, Kraft Heinz revised its expectations for organic net sales in 2024, suggesting a decline of 2% to flat growth. This marks a shift from earlier forecasts of growth.
Volume Declines and Currency Fluctuations Hurt KHC
Kraft Heinz has also been struggling with weak volume performance over recent quarters. The company reported a 3.4 percentage point decline in volume/mix in the second quarter, particularly in North America and developed markets. This downward trend raises concerns about the company’s ability to sustain overall profitability moving forward.
Its extensive international operations expose it to risks from adverse currency fluctuations. In the second quarter, unfavorable exchange rates negatively impacted net sales by 1 percentage point. Such volatility continues to be a significant concern, potentially affecting Kraft Heinz’s revenues and overall financial health.
Final Thoughts on Kraft Heinz
In conclusion, Kraft Heinz is at a crossroads. On one hand, it demonstrates solid pricing strategies and robust brand performance, which are vital for maintaining margins. It faces significant challenges, including declining consumer demand and operational difficulties. Given the mixed signals from both positive performance indicators and ongoing struggles, investors should monitor how Kraft Heinz navigates its challenges and capitalizes on growth opportunities in the coming quarters. The company currently carries a Zacks Rank #3 (Hold).
KHC’s stock has increased 7.2% in the past three months compared with the industry’s 8.7% growth.
Better-Ranked Staple Stocks
Here, we have highlighted three better-ranked food stocks, namely, The Chef's Warehouse CHEF, Flowers Foods FLO and McCormick & Company, Inc. MKC.
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2 (Buy). FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings each implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.
McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.
Zacks Investment Research
In a major move, Vectura Fertin Pharma, Inc., an affiliate of Philip Morris International Inc. PM, announced the sale of Vectura Group Ltd. to Molex Asia Holdings Ltd. This decision comes amid ongoing criticism of PM’s ownership of the asthma inhaler manufacturer as PM attempts to transition from tobacco to a broader healthcare and wellness group.
Philip Morris stated that this transaction allows Vectura to operate under Phillips Medisize, a Molex subsidiary, which is better positioned to advance its inhaled therapeutics pipeline without the constraints associated with PM’s ownership. This shift highlights the difficulties the company faced while trying to transform its business model in the face of negative perceptions.
Phillips Medisize, known for its expertise in drug delivery and medical devices, is expected to enhance its offerings by leveraging Vectura’s capabilities. This collaboration aims to introduce innovative solutions to the market, reinforcing a commitment to improving public health.
Challenges in Philip Morris’ Transformation
PM acquired Vectura in 2021 for £1.1 billion, aiming to diversify into the healthcare sector. However, the company has since taken a £516-billion impairment against the unit and revised its growth expectations. Critics have raised concerns about a tobacco company profiting from respiratory treatments, often linked to smoking-related health issues.
The backlash against PM's ownership was severe, resulting in boycotts and Vectura being excluded from key medical conferences. These challenges have hindered Vectura’s ability to engage effectively with the scientific community and establish crucial partnerships in contract development and manufacturing.
The Future of PM’s Vectura Fertin Pharma
Despite selling Vectura Group, PM's Vectura Fertin Pharma will continue as a separate entity. This division will focus on developing oral health products and inhaled prescription therapies, particularly in areas like pain management and cardiovascular emergencies. It plans to adopt a new corporate identity to signify its commitment to health and wellness.
In summary, the sale of Vectura Group marks a significant turning point for Philip Morris as it seeks to redefine its identity and focus on healthcare. Philip Morris’ strategic shift signals a promising investment opportunity, appealing to those interested in the evolving healthcare landscape. The company currently carries a Zacks Rank of #2 (Buy).
PM’s shares have gained 21.7% in the past three months compared with the industry’s growth of 22.7%.
Other Solid Staple Stocks
Here, we have highlighted three better-ranked food stocks, namely, The Chef's Warehouse CHEF, Flowers Foods FLO and McCormick & Company, Inc. MKC.
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings each indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings each implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.
McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.
Zacks Investment Research
The Coca-Cola Company’s KO strategy of becoming a total beverage company is quite on track. In the latest revelation, KO, along with Bacardi Limited, has agreed to debut BACARDI rum and Coca-Cola as a ready-to-drink (RTD) cocktail, featuring the two most renowned global trademarks.
Some of Coca-Cola’s spirit-based RTD launches include Topo Chico Hard Seltzer, Simply Spiked Lemonade, FRESCA Mixed cocktails and Jack & Coke cocktail.
Latest Cocktail to Benefit KO
The scheduled initial launch will be in select European markets and Mexico next year. This premixed cocktail will be sold in various markets across the globe. This collaboration resonates well with the company’s strategy of developing into a total beverage firm, along with growing the alcohol ready-to-drink category.
Cocktail cans will contain responsibility symbols indicating the legal drinking age. BACARDI mixed with Coca-Cola RTD will follow the marketing practices of both companies.
RTD cocktails are quite popular among consumers in the United States. A few premix cocktails grabbing the limelight are margaritas, mojitos and manhattans. Coca-Cola is aggressively diversifying its portfolio to tap into the rapidly growing RTD alcohol beverage category. It has innovated its offerings in sync with the evolving consumer preferences for healthier beverage alternatives.
The aforesaid cocktail debut of Coca-Cola and Bacardi is not the first collaboration between the brands. Most recognized globally, the Cuba Libre cocktail, invented in 1900 in Havana, includes BACARDI rum, Coca-Cola and lime. This is the two brands’ most popular cocktail, the demand for which is still growing.
Coca-Cola’s Other Notable Efforts
KO’s digital initiatives position it well for growth ahead. The company is accelerating investments to build strong digital capabilities, hence evolving into an organization that efficiently executes marketing, commercial, sales and distribution, both offline and online. It is strengthening consumer connections and piloting numerous digital-enabled initiatives through fulfillment methods to capture online demand for at-home consumption.
The company is progressing well with the rollout of multi-category eB2B platforms with its bottlers globally. Coca-Cola and its bottling partners have been investing to digitize their customer base by integrating fragmented trade customers into B2B platforms. It has been leveraging its leading brands, like Topo Chico, while expanding its existing portfolio of Schweppes premium adult cocktail mixers and tonics.
KO’s Performance
The company has been seeing positive business trends in recent quarters, driven by robust revenue growth across most of its operating segments on higher price/mix. These positive trends were evident in Coca-Cola's second-quarter 2024 results. The performance marked the sixth consecutive quarter of surpassing top-and-bottom-line expectations.
KO’s strong top-line performance was fueled by revenue growth across most segments, with organic revenues increasing 15% year over year. In the second quarter, Coca-Cola gained a global value share in the total non-alcoholic RTD beverage category.
Shares of this beverage giant have gained 15.4% in the past three months compared with the industry’s 9.8% growth. The launch of BACARDI rum and Coca-Cola RTD in 2025 will capture extra sales for this Zacks Rank #2 (Buy) company. This will boost its share in this category and increase overall profitability.
Other Stocks to Consider
The Chef's Warehouse CHEF, which is a distributor of specialty food products in the United States, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average.
The Zacks Consensus Estimate for CHEF’s current financial-year sales and earnings per share (EPS) indicates growth of 9.7% and 12.6%, respectively, from the year-ago numbers.
Flowers Foods FLO offers baked items and has a Zacks Rank of 2. FLO has a trailing four-quarter average earnings surprise of 1.9%.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS implies growth of 1% and 4.2%, respectively, from the year-ago numbers.
Utz Brands Inc. UTZ, which manufactures a diverse portfolio of salty snacks, currently carries a Zacks Rank of 2. UTZ has a trailing four-quarter earnings surprise of 5%, on average.
The Zacks Consensus Estimate for Utz Brands’ current financial-year EPS indicates growth of 28.1% from the year-ago number.
Zacks Investment Research
General Mills, Inc. GIS posted first-quarter fiscal 2025 results, wherein the top and bottom lines came ahead of the Zacks Consensus Estimate, while both metrics declined year over year. Results were hurt by the adverse net price realization and mix.
General Mills’ primary focus for fiscal 2025 is on fueling organic net sales growth, and the company progressed well toward that goal in the first quarter. GIS solidified its core by providing consumers with more exceptional experiences, resulting in improved volume, net sales and market share trends sequentially. The company also took a bold step in reshaping its portfolio with the proposed sale of its North American Yogurt business.
General Mills aims to enhance its competitiveness and regain leadership in category growth. The company plans to achieve this by delivering superior product innovation, backed by increased investments funded by strong savings from its Holistic Margin Management (“HMM”) efforts. Given these plans and the first-quarter performance, management reiterated its guidance for fiscal 2025.
The company remains committed to its Accelerate strategy, which is based on four pillars that include building brands, undertaking constant innovation, leveraging scale and standing for good. General Mills continues to focus on core markets, global platforms and local gem brands with growth prospects. It is also committed to reshaping its portfolio through prudent buyouts and divestitures.
General Mills, Inc. Price, Consensus and EPS Surprise
General Mills, Inc. price-consensus-eps-surprise-chart | General Mills, Inc. Quote
GIS’ Quarterly Performance: Key Metrics and Insights
General Mills posted adjusted earnings of $1.07 per share, which beat the Zacks Consensus Estimate of $1.05. However, the bottom line declined 2% year over year on a constant-currency (cc) basis. The downside can be attributed to the lower adjusted operating profit, elevated net interest expenses and an increased adjusted effective tax rate, partly made up by reduced shares outstanding.
GIS reported net sales of $4,848.1 million, which surpassed the Zacks Consensus Estimate of $4,780 million. The top line decreased 1% due to the adverse net price realization and mix. Organic sales also dipped 1% due to the same factors. We had expected organic sales to decline 2.3% in the first quarter.
The adjusted gross margin remained nearly flat year over year at 35.4% as gains from HMM cost savings were countered by input cost inflation and the adverse net price realization and mix. We had expected the adjusted gross margin to contract 10 bps in the quarter under review.
The adjusted operating profit came in at $865 million, down 4% at cc due to lower adjusted gross profit and increased adjusted SG&A costs. The adjusted operating profit margin contracted 50 bps to 17.8%. Our model suggested an adjusted operating margin contraction of 70 bps.
Decoding GIS’ Segmental Performance
Starting fiscal year 2025, General Mills has rebranded its previous Pet segment as North America Pet to emphasize that pet food sales outside of North America are now included in its International segment.
North America Retail: Revenues in the segment came in at $3,016.6 million, down 2% year over year due to reduced pound volume, partly made up by the positive net price realization and mix. Organic net sales also fell 2%. The segment’s operating profit declined by 7% to $746 million.
International: Revenues in the segment came in at $717 million, flat year over year, as increased pound volume (including impacts of Edgard & Cooper acquisition) was negated by the adverse net price realization and currency headwinds. Organic net sales fell 1% due to softness across China. The segment’s operating profit slumped from $50 million to $21 million.
North America Pet: Revenues came in at $576.1 million, down 1% year over year. Revenues were hurt by unfavorable net price realization and mix, partly made up by increased pound volume. Segmental organic sales also declined 1%. The segment’s operating profit came in at $119 million, up 7% on a year-over-year basis.
North America Foodservice: Revenues came in at $536.2 million, flat year over year. Also, organic net sales were flat. Sales growth across breads, biscuits, snacks and baking mixes were offset by bakery flour and pizza crust declines. The segment’s operating profit grew 21% to $72 million.
GIS’ Financial Health Snapshot & Other Developments
General Mills ended the quarter with cash and cash equivalents of $468.1 million, long-term debt of $11,431.3 million and total stockholders’ equity (excluding noncontrolling interests) of $9,275.6 million.
GIS generated $624 million in cash from operating activities in the first quarter. Capital investments amounted to $140 million during the same period. The company paid out dividends worth $338 million and bought nearly 4.5 million shares for $300 million in the first quarter.
Constant-currency sales from the joint venture of Cereal Partners Worldwide increased 1% in the first quarter. For Haagen-Dazs Japan, sales were flat year over year at cc.
General Mills recently announced that it has reached definitive agreements to sell its North American Yogurt business to French dairy leaders Lactalis and Sodiaal in cash deals totaling $2.1 billion. These transactions are anticipated to close in 2025. The combined transactions are expected to reduce General Mills' adjusted diluted EPS by about 3% within the first 12 months post-closing.
What to Expect From GIS in Fiscal 2025?
Despite ongoing economic uncertainty affecting consumers in its main markets, General Mills anticipates improvement in volume trends for its categories in fiscal 2025. However, the overall category dollar growth for the year is likely to fall short of the company's long-term growth targets. To boost organic net sales, General Mills aims to create robust experiences with its top food brands, which should lead to better household penetration and increased market share compared to the previous year.
In fiscal 2025, General Mills plans to launch new products and innovations centered on taste, health, convenience and value. The company expects to achieve cost savings of around 4-5% of the cost of goods sold through HMM initiatives, which is likely to surpass its anticipated input cost inflation of 3-4%. GIS plans to reinvest any potential margin gains into the business, boosting its investment in brand-building efforts to enhance volume performance in fiscal 2025.
For fiscal 2025, organic net sales are anticipated to range between a flat and a 1% increase. The adjusted operating profit growth at cc is anticipated between a decline of 2% and flat. Management anticipates adjusted earnings per share (EPS) growth between down 1% and an increase of 1% at cc. The company envisions a free cash flow conversion of at least 95% of adjusted after-tax earnings.
This Zacks Rank #3 (Hold) company’s shares have risen 11.8% in the past three months compared with the industry’s growth of 8.6%.
Better-Ranked Staple Stocks
Here, we have highlighted three better-ranked food stocks — The Chef's Warehouse CHEF, Flowers Foods FLO and McCormick & Company, Inc. MKC.
The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
Flowers Foods, one of the largest producers of packaged bakery foods in the United States, currently carries a Zacks Rank #2 (Buy). FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and earnings implies growth of around 1% and 5%, respectively, from the year-ago reported numbers.
McCormick is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.
Zacks Investment Research
Flowers Foods, Inc. FLO is currently trading at an attractive valuation, considering its price-to-sales (P/S) multiple, which is significantly lower than both the Zacks Food – Miscellaneous industry and the broader Consumer Staples sector. FLO’s forward 12-month P/S ratio is 0.96, lower than the industry average of 1.48 and the sector average of 8.53.
This discrepancy in valuation suggests that the stock may be undervalued relative to its peers, presenting a compelling opportunity for investors seeking value in the consumer staples space. With a Value Score of B, Flowers Foods strengthens its investment appeal, reflecting a favorable risk-reward profile.
Technical indicators are supportive of Flowers Foods’ performance. The stock is trading above both its 50-day and 200-day moving averages, indicating robust upward momentum and price stability. This technical strength reflects positive market perception and confidence in the company’s financial health and prospects.
While its recent price performance slightly trails industry peers, FLO has managed to outperform the broader market, reflecting its steady performance amid macroeconomic uncertainty. Shares of FLO have risen 5.3% in the past three months compared with the industry’s 8.6% growth and the S&P 500’s gain of 2.4%. Investors may find this combination of value, technical strength and relative market outperformance a good reason to consider Flowers Foods as a long-term investment opportunity.
FLO on Track With Strategic Priorities
The company has been on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent mergers and acquisitions. To this end, management has been shifting its focus toward becoming a more brand-focused company. Flowers Foods expects its optimized portfolio to drive market share gains through innovation.
Flowers Foods has been benefiting from its portfolio strategy, aimed at transitioning a larger part of its sales to higher-margin branded retail products, alongside enhancing the profitability of the private label and away-from-home business. The company has been solidifying its brands via innovation and marketing investments. In the second quarter of 2024, branded retail increased 0.3% year over year and formed 64.4% of sales, driven by the favorable shift toward more premium-priced products. By emphasizing branded products with higher margins, FLO aims to drive top-line growth and expand gross margins, contributing to overall profitability.
Moving to margins, the company is undertaking pricing and saving measures and efforts to enhance business efficiency. Flowers Foods has been boosting its cost structure and increased its expected annual savings from $30-40 million to $40-50 million in the second-quarter 2024 earnings release. This was achieved through targeted initiatives, including workforce reductions, reduced third-party spending and optimization of the Direct-Store-Delivery network.
Innovation & Acquisitions Drive Flowers Foods’ Growth
Innovation remains at the core of Flowers Foods' strategy, with several new product launches contributing to growth. The introduction of DKB Amped-Up Protein Bars and the expansion of DKB Snack Bites highlight the company’s ability to extend its brand into adjacent categories like snacking, which offers substantial growth potential. By leveraging Dave’s Killer Bread’s brand equity, Flowers Foods is driving incremental revenues and diversifying its product portfolio, setting the stage for sustained growth in 2025 and beyond.
Acquisitions play a crucial role in Flowers Foods' growth strategy, allowing the company to expand its brand lineup, geographic coverage and product offerings. By seeking potential acquisitions and investments that align with its strategic priorities, Flowers Foods aims to strengthen its position in core categories and pursue opportunities in emerging markets. The company’s most recent acquisition of Papa Pita Bakery (concluded in February 2023) has been contributing to its results.
What to Expect From FLO in 2024?
For fiscal 2024, Flowers Foods expects sales in the range of $5.091-5.172 billion, suggesting flat to a 1.6% increase year over year. Adjusted EBITDA is likely to be in the range of $524-$553 million compared with $501.7 million recorded in fiscal 2023. For fiscal 2024, the adjusted EPS is envisioned in the range of $1.20-$1.30 compared with $1.20 delivered in fiscal 2023.
Reflecting the positive sentiment around Flowers Foods, the Zacks Consensus Estimate for earnings per share has seen upward revisions. Over the past 30 days, analysts have increased their estimates for the current and next fiscal year by 2 cents each to $1.26 and $1.33 per share, respectively. These estimates indicate expected year-over-year growth rates of 5% and 5.4%, respectively.
Investors’ Playbook for FLO Stock
Flowers Foods presents a compelling investment opportunity, driven by its attractive valuation, solid technical performance, and strategic focus on innovation and brand expansion. With sales and earnings forecasts indicating a steady improvement in fiscal 2024, coupled with upward revisions in earnings estimates, Flowers Foods is well-positioned for continued success. As the company continues to execute its strategic priorities, FLO remains an excellent choice for those looking to capitalize on growth within the food industry. The company currently carries a Zacks Rank #2 (Buy).
Other Solid Food Stocks
The Chef’s Warehouse CHEF, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.
McCormick MKC is a leading manufacturer, marketer and distributor of spices, seasonings, specialty foods and flavors. It currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for McCormick & Company’s current fiscal-year sales and earnings indicates advancements of 0.1% and 5.6%, respectively, from the year-ago reported figures. MKC has a trailing four-quarter earnings surprise of 8.3%, on average.
Ingredion Incorporated INGR, which manufactures and sells sweeteners, starches, nutrition ingredients and biomaterial solutions, currently carries a Zacks Rank #2. INGR has a trailing four-quarter earnings surprise of nearly 11%, on average.
The Zacks Consensus Estimate for Ingredion Incorporated’s current financial-year earnings implies growth of 5.6% from the year-ago reported numbers.
Zacks Investment Research
Fomento Economico Mexicano S.A.B. de C.V. FMX alias FEMSA shares have witnessed a pullback from the beginning of 2024, with the stock declining as much as 20.8% in the year-to-date period. This pullback in share price relates to the challenges in the Health division that have impacted its performance in recent quarters.
FEMSA’s Health division is in a weak spot due to its operations in diverse and often challenging macroeconomic and commercial environments. The Health division is facing complex, competitive, and regulatory issues in several markets, particularly Mexico. This led to disappointing top-line results and soft operating income for the segment in second-quarter 2024.
The segment’s revenues in the second quarter were pressured by a persistent negative competitive landscape in Mexico and tough macroeconomic conditions in Ecuador, partially offset by growth in Chile and Colombia. These disappointing revenue trends also led to weaker operating results, with operating income down 14.8% year over year and operating margins contracting by 70 basis points to 4.1%.
Despite these challenges, the company is focused on turning around the Health division by quickly adapting country-specific strategies to counter and reverse these negative trends. However, while these efforts are underway, the timing for the near-term recovery of the segment remains uncertain.
In the year-to-date period, FEMSA’s shares have lagged the broader industry’s growth of 13.1% and the Consumer Staples sector’s gain of 10.9%. The stock also underperformed the S&P 500 indices 18.1% return for the period.
FEMSA's One-Year Stock Price Performance
Is a Turnaround Possible for the FEMSA Stock?
Although FEMSA’s Health division looks far from witnessing a recovery in the near-term, the company’s progress with its FEMSA Forward Strategy, launched in February 2023, bodes well. The plan focuses on creating long-term value in its core businesses: retail (including the Health Division), Coca-Cola FEMSA, and Digital@FEMSA.
The strategy also includes exploring alternatives for its strategic businesses, including potential divestments. As part of this initiative, the Zacks Rank #3 (Hold) company sold 13.9% of its outstanding shares in Heineken in 2023, reducing its stake to less than 1%. The company also plans to divest its interests in Solística and other non-core businesses by April 2025, reducing its impact on consolidated results. Additionally, in 2023, FEMSA merged Envoy Solutions with BradyIFS, retaining a 37% ownership stake in the combined entity.
FEMSA’s Proximity and Health retail businesses present strong potential for long-term growth and value creation. The company is set to accelerate earnings growth through organic expansion and by enhancing consumer value across formats and markets.
OXXO Mexico remains a core part of FEMSA’s retail operations, focusing on refining its value proposition and expanding its reach. OXXO’s network in Mexico now exceeds 1,000 stores, with rising productivity. In the Health division, FEMSA is leveraging its multi-country presence to optimize purchasing, pricing, supply chain, and other key areas.
FEMSA is rapidly expanding OXXO stores in South America, surpassing 500 locations in Brazil and approaching that in Colombia. The company aims for South American OXXO to match Mexico’s scale. It is also growing its Proximity discount format with Bara stores and developing new formats like coffee drive-throughs. In Europe, FEMSA is expanding with Valora, focusing on retail, food service, and B2B segments.
FEMSA has made a significant move to expand its U.S. retail presence by agreeing to acquire Delek US Holdings' retail business for $385 million. The deal, set to close in the late third quarter or fourth quarter of 2024, includes 249 DK-branded convenience stores, mainly in Texas and New Mexico, with some in Arkansas. Most stores also have gas stations under the DK and Alon brands, and the acquisition includes Delek's small fuel transportation fleet. FEMSA sees this as a strategic entry into the U.S. convenience and mobility market, aligning with its long-term growth strategy to boost shareholder value.
FEMSA is accelerating its digital efforts through Digital@FEMSA, its tech and innovation unit focused on creating value-added digital and financial ecosystems for consumers and businesses. This unit also enhances and leverages FEMSA's core business assets. Coca-Cola FEMSA leads with its omni-channel strategy, while the Proximity division drives digital initiatives in OXXO stores. FEMSA continues to invest in digital solutions, loyalty programs, and fintech platforms within OXXO to strengthen its long-term position.
FEMSA’s Estimates Show Mixed Trend
For 2024, the Zacks Consensus Estimate for FMX’s sales and earnings per share (EPS) implies a 2.4% and 3.7% year-over-year decline, respectively. The consensus mark for 2025 sales and earnings indicates 2.9% and 2.2% year-over-year growth, respectively.
The Zacks Consensus Estimate for FMX’s EPS increased 6.3% for 2024 and declined 2.3% for 2025 in the last 30 days.
Conclusion
FEMSA’s Health division faces significant challenges due to tough competitive and macroeconomic conditions, particularly in Mexico and Ecuador. While FEMSA is working to address these issues through targeted, country-specific strategies, the path to recovery remains uncertain in the near term.
However, FEMSA's strategic focus on expanding its retail footprint, advancing digital initiatives, and optimizing its core business operations positions the company for sustainable long-term growth. The company is well-equipped to capitalize on new opportunities, strengthen its competitive edge, and deliver enhanced value to shareholders.
3 Consumer Staples Stocks to Consider
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely The Chef's Warehouse CHEF, Coca-Cola KO and Flowers Foods FLO.
The Chef's Warehouse offers specialty food products in the United States. CHEF presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 33.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for CHEF’s current financial year’s sales and EPS indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported figures.
Coca-Cola, the global beverage giant, currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 4.7%, on average.
The Zacks Consensus Estimate for KO’s current financial-year sales and earnings suggests growth of 0.6% and 6%, respectively, from the year-ago reported figures.
Flowers Foods emphasizes providing high-quality baked items, developing strong brands, making innovations to improve capabilities and undertaking prudent acquisitions. It currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for FLO’s current financial-year sales and earnings indicates growth of 1% and 5%, respectively, from the year-earlier actuals. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
Zacks Investment Research
Diageo DEO shares have portrayed a dismal performance on the bourses since the start of 2024. The stock pullback stems from the troubles faced in the company’s key markets, including the Latin America and Caribbean (LAC) and North America. The gloomy outlook for these segments has hurt investors’ sentiments for the stock.
Shares of this London-based alcohol company have lost 8.4% in the year-to-date period compared with a 7.2% decline in the broader industry and 10.9% growth in the Consumer Staples sector. In the same time frame, the S&P 500 has risen 18.1%. The DEO stock has also lost 16% in the past year and plunged 28.9% in the past three years.
The stock’s current price of $133.40 reflects an 11.7% premium to its 52-week low mark of $119.48 and a 17.5% discount from its 52-week high of $161.64.
Diageo’s One-Year Stock Price Performance
Diageo is trading below its 200-day moving average, indicating a bearish outlook and challenges in sustaining the recent performance levels.
DEO’s Stock Trades Below 200-Day Moving Average
Major Setbacks Limiting DEO’s Growth Potential
Diageo’s recent struggles are related to the fast-changing consumer sentiment and high inventory levels, affecting its LAC business, which accounts for 10% of its net sales. In fiscal 2023, changing consumer preferences led to elevated inventories, and the situation worsened in fiscal 2024 as the company struggled to align stock with sluggish demand.
While Brazil, Central America, the Caribbean, and parts of South LAC saw some demand stabilization and market share gains in the latter half of fiscal 2024, Mexico faces a highly competitive landscape and consumer downtrading.
Net sales in LAC fell 15%, with organic net sales down 21% in fiscal 2024. This was driven by reduced demand for premium international spirits, inventory adjustments, and strong comparisons with last year's growth. Price/mix dropped 6 percentage points due to consumer downtrading and increased trade investments. Despite efforts to address these issues, Diageo remains cautious about its LAC outlook, anticipating continued macroeconomic challenges.
The North American performance remains a concern for Diageo, as the U.S. spirits market is impacted by a cautious consumer environment, retailer inventory adjustments, and comparisons with last year's restocking. Net sales for the U.S. spirits category declined 3% in fiscal 2024, driven by a 5% volume drop. The North America segment saw a 2% decline in net sales and a 3% drop in organic sales due to lower sales in U.S. Spirits and Canada, partially offset by growth in Diageo Beer Company. At the end of fiscal 2024, distributor inventories were in line with historical norms.
In addition to sluggish revenue trends, Diageo is grappling with inflationary pressures caused by rising costs for commodities like agave, higher energy expenses, and supply chain disruptions. While productivity savings, supply efficiencies, and pricing adjustments have helped offset some of these pressures, significant cost increases in glass, paper, metal, and transportation have strained finances.
Organic operating profit dipped 4.8% year over year in fiscal 2024, with a $302 million decline in the LAC region and a $142 million decrease in North America. The organic operating margin declined 130 basis points, impacted by weak performance in the LAC region and a cautious U.S. consumer market.
The company expects a difficult operating environment to continue in fiscal 2025, with the fiscal 2024 trends persisting. The negative impact on the organic operating margin seen in the second half of fiscal 2024 is anticipated to carry over into fiscal 2025.
DEO's Premium Valuation
Despite the downside, Diageo is trading at a forward 12-month P/E multiple of 18.68X, exceeding the industry average of 17.68X.
The premium valuation suggests that investors have strong expectations for Diageo’s future performance and growth potential. However, the stock seems somewhat overvalued at these levels. As a result, investors might be hesitant to buy at these elevated levels and may prefer to wait for a more favorable entry point.
Diageo’s Estimates Reflect Uptrend
The Zacks Consensus Estimate for DEO’s fiscal 2024 and 2025 earnings per share (EPS) has risen 0.3% and 0.6%, respectively, in the past seven days. The upward revisions in earnings estimates indicate analysts’ improved confidence in the stock.
Long-Term Growth Plans on Track
Although the above discussion might cause some concern, Diageo is making solid progress on its new productivity goal, aiming to achieve $2 billion in savings over three years (fiscal 2025 to 2027). These savings are expected across the cost of goods sold, marketing, and overheads, driven by investments in the supply chain agility program launched in July 2022. The company anticipates benefits from this program to grow starting in fiscal 2025 and accelerate in subsequent years.
Diageo plans to continue leveraging productivity and pricing strategies to counter cost inflation while investing in strategic initiatives for sustainable long-term growth. The company remains confident in the growth potential of the total beverage alcohol sector and aims to increase its value share in the market to 6% by 2030, a 50% rise from current levels.
Diageo is also on track to meet the medium-term target for fiscal 2023-2025, which includes 5-7% organic sales growth and organic operating profit growth in line with net sales.
What is the Best Approach: Buy the Dip or Shy Off?
While Diageo looks poised for long-term growth, caution is warranted for prospective investors, given the ongoing challenges in LAC and North America. DEO’s premium valuation relative to industry peers raises concerns about its sustainability, especially amid competitive pressures and economic uncertainties. Investors should consider these factors carefully and evaluate their risk tolerance.
Current shareholders may consider locking in gains, whereas new investors should exercise caution before approaching this Zacks Rank #5 (Strong Sell) stock.
3 Consumer Staples Stocks to Consider
We have highlighted three better-ranked stocks from the Consumer Staple sector, namely The Chef's Warehouse CHEF, Coca-Cola KO and Flowers Foods FLO.
The Chef's Warehouse offers specialty food products in the United States. CHEF presently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 33.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for CHEF’s current financial year’s sales and EPS indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported figures.
Coca-Cola, the global beverage giant, currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 4.7%, on average.
The Zacks Consensus Estimate for KO’s current financial-year sales and earnings suggests growth of 0.6% and 6%, respectively, from the year-ago reported figures.
Flowers Foods emphasizes providing high-quality baked items, developing strong brands, making innovations to improve capabilities and undertaking prudent acquisitions. It currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for FLO’s current financial-year sales and earnings indicates growth of 1% and 5%, respectively, from the year-earlier actuals. FLO has a trailing four-quarter earnings surprise of 1.9%, on average.
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