Heinz Faces a Difficult Year
Heinz's (NYS: HNZ) drive to grow its global productivity took its toll as the company's fourth-quarter profits dropped by 22%. On the brighter side, when you exclude these one-time charges, the company's adjusted profits rose by 8%. While Heinz did reduce its growth outlook in the face of tough economic conditions, the company also came out with plans to spend more to help drive its business forward.
It's been a challenging environment for food makers across the board as they've tried to combat the pressures of rising input costs by increasing prices. Some companies have had an easier time doing this than others. And big steps have had to be taken. General Mills (NYS: GIS) recently announced it would look to cut 850 jobs and use those savings to help make new products to drive sales.
The quarter at hand
Turning to Heinz's fourth quarter, total revenue increased by 6% from the year-ago period. Sales growth was driven by double-digit growth from emerging markets, with organic sales in the region rising by 17%. Heinz's acquisition of Brazilian food company Quero helped drive additional sales growth, as well. Overall, Heinz's global portfolio posted a 4.5% rise in organic sales, which includes the dual effect of a 3% rise in net pricing and a 1.5% increase in sales volume.
The company's sales were also helped by increased marketing efforts. Marketing costs this quarter rose by 7.7%, excluding the productivity-related charges. These charges include more spending on Project Keystone, a worldwide project to help improve and synchronize systems and processes. Including these charges, Heinz's operating income fell by 22%. Its operating margin thus contracted to 9.9% from 13.4% a year ago. Food makers' margins in general have been hit this quarter. Peer Campbell Soup (NYS: CPB) , whose first-quarter profits slid by 5%, saw its operating margin fall to 15% from 20% last year.
On the horizon
If you look at it from a broader perspective, Heinz didn't do too badly during this quarter. The company will look to continue its brand building and marketing efforts to help drive sales, especially abroad. The company said it expects more than $120 million in business-building expenditure in the next fiscal year.
Heinz has also started introducing more and more items at lower prices and in smaller packages that are primarily targeted at low-income consumers in the U.S. Given that economic conditions aren't very encouraging, we can expect more such offerings in the future. Since the European economy is also in a weak state, we may see such products being offered in those markets, as well.
Along with new products and marketing initiatives, Heinz is on the lookout for new businesses in budding economies. It'll possibly look to acquire more food businesses in emerging markets. It's going to be an interesting but tough year for the packaged-food maker. The pressure of rising commodity costs is possibly going to weigh on margins and there is no guarantee that price increases are going to be well-received. To stay up to date on how Heinz tackles these problems, use the help of our free Watchlist service by simply clicking here.
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At the time this article was published Shubh Datta doesn't own any shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended buying shares of Heinz. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.