(Bloomberg Opinion) -- It was hard to imagine things getting worse for Kraft Heinz Co. than they did back in February, when the company dropped a cavalcade of bad news: It took a massive writedown, slashed its dividend and revealed an SEC subpoena related to an accounting investigation, all on top of reporting that profitability in the quarter had fallen short of expectations.
That moment felt like it had to be rock bottom for a company that had been trying to cost-cut its way to earnings growth, per the typical playbook of one of its biggest shareholders, private equity firm 3G Capital. But Kraft Heinz’s latest results, released Thursday morning, made it clear the worst isn’t over.
Kraft Heinz said organic sales fell 1.5% from a year earlier for the six months ended June 29, reflecting declines on this measure (which excludes the effects of currency fluctuations and M&A) in the U.S., its largest market. Cost inflation in everything from packaging to logistics, as well as promotional expenses, weighed on profit. Operating income declined 54.6% from a year earlier to $1.3 billion.
Even more worrisome, the company also said it was pulling its full-year earnings and sales guidance, a move that suggests a real uncertainty about the company’s path to growth. That rightly spooked investors, who sent Kraft Heinz shares to all-time lows in morning trading.
It all made for a not-so-warm welcome from Wall Street for new CEO Miguel Patricio, who was appointed in April, started in the role in July, and appeared on the company’s investor conference call for the first time Thursday. But he also didn’t help himself as much as he could have during the call, because he didn’t offer a particularly clear and specific vision for a turnaround.
When an analyst asked about potentially selling off weak brands, he said that question “is not on the table” right now. I can see how that wasn’t a reassuring answer for investors, who see obvious benefits in unloading troubled assets.
When asked about how he was going to improve top-line growth and boost sales, Patricio mentioned Hispanic consumers as an example of a demographic group Kraft Heinz wasn’t doing a great job of courting. He also spoke about a need to revamp its marketing. But again, this was broad-brush strokes, not details.
I realize a fully formed comeback plan may be a tall order for an executive who has only been in the job 40 days. But when the turnaround effort at hand is going to be as heavy a lift as this one, I understand why investors weren’t comforted by a general outline.
That said, there were a few positives in some of Patricio’s Thursday remarks. In particular, I was heartened by his answer when an analyst asked him about how his previous experience as an executive at beer giant Anheuser-Busch InBev (another 3G holding) would shape his approach at Kraft Heinz.
He mentioned AB InBev’s success at using “premiumization” – or making more upscale products that would appeal to craft beer devotees – to increase sales. He noted that in the packaged food industry, premiumization has largely been driven by upstarts. He’s right about that, and I agree it’s a major opportunity for Kraft Heinz. I wrote just last week about how Procter & Gamble Co., another consumer-goods giant, has returned to health in part by focusing on more high-end products that warrant higher price tags. I think Kraft Heinz could reap similar benefits if it pursued a similar approach.
After Thursday’s results, Patricio’s turnaround task looks as hard as ever, and there is no time to waste. He said shareholders would see the results of a full strategic review by early next year. Too bad a bunch of investors decided not to stick around and wait for it.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
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Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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