The H. J. Heinz Company (HNZ) did not meet the net sales target for fiscal 2009. Net sales were flat year-over-year due to a 7% unfavorable currency translation, commodity inflation, and the global economic slowdown. The company had targeted sales growth of 6% for fiscal 2009. Moreover, both gross and operating margins were also down for the year.
Raw materials and packaging used in the company’s business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations from a number of factors. Commodity inflation has been constricting the company’s margins.
In addition, the company operates in the highly competitive food industry and experiences worldwide competition in all of its principal products. This often forces the company to reduce its pricing, while increasing marketing or other expenditures, which in turn may have a material adverse effect on its profitability. Moreover, mounting competition – primarily from private labels – is creating pricing pressure across all product lines.
The company is also witnessing weak demand due to the global economic slowdown. Despite debt reduction initiatives by management, the debt position remains relatively high. The company has a debt-to-capitalization ratio of 72%.
However, Heinz’s growth in domestic businesses, strengthening international operations, and focused resource allocation are optimistic factors for the company’s outlook. Management is also strongly focused on the top 15 brands, which hold strong market positions and represent nearly 70% of total sales.
Furthermore, the company is restructuring by focusing on building the core portfolio, reducing costs to improve margins and generating cash flow.
For fiscal 2010, management plans to maintain sustainable profits through pricing and productivity gains (from its cost reduction efforts), which it expects will offset the 8% to 9% inflation in commodities.
Given, the near term concerns of lower volumes and higher commodity costs, we are downgrading our rating on the stock from Outperform to Neutral.
HNZ manufactures and markets processed food products worldwide. Its products primarily include ketchup, condiments & sauces, frozen food, soup, beans, meals & snacks, and infant foods.
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