NEW YORK – Kraft Heinz Co. wrote down on Thursday the value of its Kraft and Oscar Mayer brands by $15.4 billion, disclosed an investigation by federal securities regulators and slashed its dividend, sending its stock down more than 20% in after-hours trading.
Kraft Heinz said it faced unexpectedly higher costs last year, and it has seen significant pressure on the value of its brands since its $49 billion merger in 2015. The write-down caused Kraft Heinz to swing to a fourth-quarter loss, marking a striking reversal after several years of radical cost-management efforts and higher profit margins that were seen as a model for the packaged-food industry.
“We were overly optimistic on delivering savings that did not materialize,” Chief Executive Bernardo Hees said on a conference call with investors.
Kraft Heinz Chief Financial Officer David Knopf said the company is considering selling some brands that have “no clear path to competitive advantage” or have low profit margins. He said doing so could better position Kraft Heinz to merge with another food maker.
The stream of developments comes at a pivotal moment for the company, which has been struggling to keep up with consumer shifts towards simpler ingredients and healthier food. Many of the company’s brands, like Jell-O desserts and Kool-Aid drink mix, clash with current trends. Like other food makers, Kraft Heinz is trying to innovate while also maintaining its industry-leading profitability – a balancing act that fell apart in the latest quarter.
The firm said its brands like Oscar Mayer hot dogs and Kraft Mac & Cheese returned to sales growth after several years of declines. But profit margins suffered as a result, making the brands less valuable.
Hees, in acknowledging the stream of disappointing news on Thursday, tried to reassure investors by saying the company is positioning itself to be part of “more consolidation in the future that we believe is necessary and will happen.”
Two years ago, Kraft Heinz attempted to merge with Unilever PLC but the deal fell apart, and KraftHeinz has since been quiet on that front.
Kraft Heinz also said on Thursday the Securities and Exchange Commission is investigating its accounting practices in its procurement division. The company said it has concluded an internal investigation into the matter, which led to a separate $25 million charge in the quarter. The charge related to higher costs for ingredients and other expenses that should have been recorded in previous quarters.
Kraft Heinz said that it is cooperating with the agency and that the charge isn’t material to earnings, as the company spends more than $11 billion on procurement annually.
Investors have long punished the company, with shares down nearly 30% from a year ago before Thursday’s aftermarket drop to about $38.20. The stock is projected to open Friday at its lowest price since the merger.
JPMorgan analyst Ken Goldman said that maybe Kraft Heinz’s belt-tightening strategy went too far, damaging the brands and prompting the write-down.
Executives at Kraft Heinz slashed $1.75 billion in annual spending through its merger, but that effort wrapped up at the end of 2017. The company continued its stringent budgeting approach to eke out additional savings by examining each cost closely and not just adding to the previous year’s budget. The company popularized that method, known as zero-based budgeting, spurring others in the industry to adopt it.
But last year, the process didn’t generate enough to cover the investments Kraft Heinz needed to stoke sales growth.
With sales stubbornly declining, Kraft Heinz spent an additional $300 million last year on marketing its brands, developing new ones and renovating recipes to make them trendier.
The move accelerated what would have been three years of investments into one year. The money also went into making improvements to its supply chain and adding more salespeople to visit stores and make sure products are stocked correctly.
Kraft Heinz’s profit, excluding things like interest payments, taxes and restructuring costs, fell 14% in the quarter. For years, this measure, known as adjusted Ebitda, had routinely risen at the company thanks to its attention to cost cutting.
Some of the company’s efforts to orchestrate a turnaround helped boost sales of products like Planters nuts, Oscar Mayer deli meat and Capri Sun. Comparable sales rose 2.4% in the fourth quarter.
Kraft Heinz also slashed its quarterly dividend to 40 cents a share from 62.5 cents, which Knopf said would better position Kraft Heinz for industry consolidation.
Overall, Kraft Heinz posted a loss of $10.34 a share largely due to the write-down of its assets. On an adjusted basis, it logged earnings of 84 cents a share, down 6.7% from a year ago, and revenue of $6.89 billion, a 0.7% rise. Both measures fell below analyst projections, according to FactSet.