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Will Cost Cuts Drive Kraft Heinz's (KHC) Earnings in Q3?

The Kraft Heinz Company KHC is set to report third-quarter 2017 results, after market close on Nov 1.
 
Last quarter, this packaged food manufacturer delivered a positive earnings surprise of 2.08%. Also, the company delivered positive earnings surprises in three of the last four quarters, the average beat being 3.68%. The chart below depicts the surprise history.
 

The Kraft Heinz Company Price and EPS Surprise
 
 
 
The company has been seeing top-line weakness over the past several quarters due to soft global retail and consumer demand. In the first half of 2017, reported sales of $13.04 billion declined 2.4% year over year due to soft consumer demand in North America and Canada. In fact, the food industry, which includes legacy brands like General Mills Inc. GIS, Mondelez International, Inc. MDLZ and The Kellogg Company K have been performing dismally for quite some time.
 
Consumption trends in a number of the company’s key categories remain challenged. Three of the four reporting segments registered year-over-year decline during this period, with the steepest decline in Canada (down 8.9%) and Europe (down 5.8%). Its flagship U.S. segment saw a 2.3% year-over-year decline in net sales. The company’s overall organic sales also declined 1.8% during the period. The trend is expected to persist in the to-be-reported quarter.
 
Nevertheless, the company expects organic sales growth to ramp up in the third and fourth quarter of 2017. This will likely be driven by strong marketing, go-to-market and product quality initiatives. 
 
Kraft Heinz has implemented several cost-saving initiatives, including the integration of Kraft Foods and Heinz. The company plans to cut annual costs by $1.7 billion by 2017-end, primarily through work-force reduction along with factory closures and consolidations. Cost savings have driven margins for the company, mainly in the developed markets of the United States and Europe.
 
Other productivity improvement initiatives include programs such as zero-based budgeting, modernization and capability building within the manufacturing footprint.
 
However, adverse impact of lower volumes, higher commodity costs and foreign exchange headwind could hurt profits in the to-be-reported quarter.
 
Overall, for the third quarter, the Zacks Consensus Estimate for earnings is pegged at 83 cents, reflecting a 0.3% year-over-year increase. The consensus estimate for revenues is $6.3 billion, implying a 0.9% increase.
 
Here is what our quantitative model predicts:
 
Kraft Heinz does not have the right combination of ingredients — a positive Earnings ESP  and Zacks Rank #3 (Hold) or higher — which increase the odds of an earnings beat.
 
Zacks ESP: The Earnings ESP for Kraft Heinz is +0.56%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.  
 
Zacks Rank: Kraft Heinz carries a Zacks Rank #4 (Sell). Notably, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.
 
 
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General Mills, Inc. (GIS): Free Stock Analysis Report
 
Kellogg Company (K): Free Stock Analysis Report
 
Mondelez International, Inc. (MDLZ): Free Stock Analysis Report
 
The Kraft Heinz Company (KHC): Free Stock Analysis Report
 
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