Evercore downgrades Kraft Heinz on sales headwinds, gross margin risks

Evercore ISI cut its rating on Kraft Heinz (NASDAQ:KHC) stock from Outperform to In-Line and reduced the price target to $35 from the previous $38.

The investment bank cited several reasons for the downgrade, including a 4% year-over-year decline in 12-week measured channel sales and limited visibility on when sales will stabilize.

The need for increased investment spending, which could impact gross margins, and potential headline risks related to Mondelez (NASDAQ:MDLZ) International Holdings (MAHA) in 2025 were also factors in the decision.

“We plan to revisit the story if/when US sales meaningfully improve,” Evercore analysts noted.

Ahead of Kraft Heinz's fourth-quarter earnings, Evercore maintained its estimates, projecting consolidated organic sales to drop by 2% year-over-year, with a gross margin decrease of 110 basis points due to inflation, supply chain issues, and increased promotional activities.

The firm anticipates a continued weakness in North America, which represents 75% of Kraft Heinz's sales, with a particular decline in US measured channel sales nearing 4% for the period ending December 15, impacted by challenges in products like Lunchables, Capri Sun, and Mac&Cheese.

On the other hand, Evercore forecasts a modest improvement in US Foodservice sales, which comprise 12% of the North American segment, expecting a 3% year-over-year increase. It also predicts emerging market sales growth of 5% year-over-year, although it acknowledges China as a continuing headwind. International organic sales are expected to decline by 2% year-over-year.

Looking further ahead, Evercore has lowered its 2025 estimates for Kraft Heinz. The firm now expects consolidated operating income to decrease from $5.4 billion to $5.28 billion, with earnings per share (EPS) adjusted from $3.05 to $3.03.

“We now assume the company will need to increase merchandising and promotions more in 2025 and model gross margin down 75bp YoY (cons flat) with pressure more 1H weighted,” analysts continued.

“We think innovation and merchandising initiatives to stables sales trends in US retail will take time.”

Still, Evercore continues to expect ongoing productivity gains and moderate growth in international and emerging market sales.