Heinz Grapples With Weak Traffic, Inflation In Business Recovery

Nov.28.11 | About: The Kraft (KHC)

With restaurant customer traffic in the U.S. Foodservice failing to pick up, Heinz continues to feel the heat. To compound the weak traffic trends, high commodity inflation further weighed down the division’s gross margin in excess of 500 basis points. Heinz’s U.S. Foodservice segment deals with commercial (bars, restaurants, travel/leisure places, vending machines, take-outs) and non-commercial (schools, hospitals, prisons, military) food outlets and distributors. Heinz manufactures and markets an extensive line of processed food products and competes with major food and consumer companies like Kraft Foods (NYSE:KFT), Tyson Foods (NYSE:TSN), ConAgra Foods (NYSE:CAG) and Campbell Soup Company (NYSE:CPB).

Weak traffic trends in U.S. Foodservice not getting any better

The U.S. Foodservice business had a tough quarter with continued weakness in restaurant traffic and high input commodity inflation that continued to adversely affect the business, coupled with the impact of promotional timing. The segment contributes to more than 12% of Heinz’s annual revenue. Declining restaurant traffic led to more than 5% decline in sales volume, getting further weak after the 3-4% volume decline last quarter. Despite a positive pricing of 2-3%, the segment’s revenue declined by 3% and operating income deteriorated by 30%.

Commodity inflation making it worse

U.S. Foodservice segment’s dismal performance also weighed down Heinz’s gross margin that has already been struggling under intense input commodity cost inflation exceeding 10% this quarter. The company’s overall gross margins worsened by 180 bps this quarter with almost 25% of the company’s operating income decline coming from this segment alone, after the division’s gross margin dropped by more than 500 basis points.

(Chart created using Trefis' app)

We have a revised $54.50 Trefis price estimate for H.J. Heinz Company, which is around 8% ahead of the market price.

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