The Kraft Heinz

Organic sales slipped 1.3% in Kraft Heinz's second quarter, as a 1.3% benefit from inflation-driven pricing was offset by a 2.6% pullback in volumes. The adjusted operating margin contracted 350 basis points to 16.6%, reflecting inflationary headwinds and stepped-up brand spending.

Why it matters: Facing mounting competitive pressures against a strained consumer spending backdrop, Kraft Heinz announced in February its intentions to spend an incremental $600 million this year on its brands and capabilities (with a third of that investment already deployed). This spending is yielding improved returns, up 3.4 and 6 percentage points on promotions and advertising spending, respectively. As such, 36% of its global revenue base is gaining or holding share year to date, which is up from just one-fifth in fiscal 2025. Given the traction realized from these initial efforts, it intends to allocate another $100 million toward marketing in fiscal 2026. This aligns with our forecast for Kraft Heinz to expend 6.5% of sales ($1.7 billion) each year through fiscal 2035 on research, development, and marketing.

The bottom line: Management is now calling for organic sales to fall 0.5%-2% (from a prior 1.5%-3.5% drop) and for adjusted EPS of $2.03-$2.09 ($1.98-$2.10), in line with our outlook before the earnings call (down 1.2% and $2.05, respectively). Our $40 fair value estimate for narrow-moat Kraft Heinz holds. Shares slipped 3% on the earnings and trade at a 35% discount to our valuation. We think the market doubts the firm can spur durable volume growth in an intensely competitive market with consumers hankering for healthier options without investing substantially more in its brands. However, we believe its targeted approach to boosting consumer-valued innovation, enhancing marketing, and increasing affordability should ultimately manifest in around 2% annual sales growth against high-teens operating margins.

After digesting Kraft Heinz's second-quarter results (1.3% downdraft in organic sales and a 350-basis-point erosion in its adjusted operating margin to 16.6%) and a time value of money impact, we're edging up our fair value estimate to $41 per share, from $40. We forecast a 2% decline in fiscal 2026 sales, flat sales in 2027, and low-single-digit growth thereafter. Our revised valuation implied a fiscal 2027 enterprise value/adjusted EBITDA multiple of around 12 times.

On a consolidated basis, macro pressures persist, as management expects unrelenting inflationary headwinds to continue (with inflation up more than 4% in fiscal 2026). While consumers could further tighten their purse strings in the face of mounting financial strains, more muted exposure to private label (at just 11% now versus 17% in 2019, materially below the high teens to low 20s across US food and beverage) and enhanced agility in aligning its mix with evolving consumer trends should blunt any lasting downdraft in Kraft Heinz’s margins. As such, we forecast a gross margin in the low-30s again this year, about 100 basis points shy of the average generated in the five years preceding the pandemic.

But we don't think Kraft Heinz is sitting still. It plans to boost spending (to $700 million now, up from $600 million) on research, development, and marketing (including adding personnel), which we applaud. Like others, Kraft also intends to alter pack sizes and lower opening price points to enhance its appeal to cash-constrained consumers. While promotions won't lead to durable volume and market share gains, we see prudence in these steps after rampant inflation-driven price hikes. We expect Kraft Heinz to press forward in these pursuits, expending 6%-7% of sales annually on its brands while investing around 3.5% to enhance its capacity and digital competence.

We believe that the ability to reliably deliver products to store shelves, even as supply chains were disrupted, has bolstered the company's previously strained relationships with its retail partners. Even though consumers are venturing beyond their homes for food consumption and competition is intensifying now that supply/demand imbalances have largely been put to rest, we think its strategic playbook, centered on increasing brand spending and enhancing its category management and e-commerce capabilities, should enable Kraft Heinz to eke out top-line gains in time. Taking this together, our longer-term forecast calls for 2% average annual sales growth and operating margins of around 19%.

Despite Kraft Heinz's decision to put its split on hold, our Morningstar Economic Moat Rating of narrow is unchanged. Our assessment is based on the strength of its intangible brand assets, which provide modest cost benefits.

Since the tie-up in 2015, Kraft Heinz has operated as one of North America's largest food and beverage companies, with approximately $19 billion in sales on its home turf in 2025 and just under $25 billion globally. Recall that we took away the firm’s moat in August 2018 because the former management team prioritized near-term profitability and cash flows, at the expense of the business' long-term health, as it shunned brand investments. This led to execution issues (which strained relationships with retailers) and innovation that didn’t keep pace with evolving consumer trends. As a result, its brands lost market share and shelf space at leading retailers.

However, following a management shakeup in mid-2019, which saw Miguel Patricio (the former chief marketing officer of AB InBev) take the helm, Kraft Heinz has been formulating an enhanced recipe, anchored in pursuing durable efficiencies, elevating brand spending (behind marketing and product innovation), strengthening its capabilities (related to category management and e-commerce), and leveraging its scale to respond more nimbly to changing market conditions. While we see these actions as directionally sound, we expect even more to be done to enhance its brand appeal in the eyes of consumers under Cahillane. In this context, Kraft Heinz has been spending an average of 4%-5% of sales on research, development, and marketing annually (up from low single digits historically) over the past several years, but we now expect investments in these areas to trend toward 6%-7%, which is more on par with peers. We see this spending as crucial to ensuring its products align with evolving consumer trends while also increasing the stickiness of its retailer relationships. Even with the merits we see in these investments, we don't claim that simply funneling additional resources into research and development, marketing, and/or capital expenditures alone is sufficient to right its ship.

Evidencing its competitive standing, the firm has boasted leading (and, in some instances, improving) share positions in the aisles in which it competes. In this context, Kraft Heinz now controls around 62% of the North American spreadable cheese aisle, with its Philadelphia brand up from 60% in 2019, as the firm has focused on moving to a cleaner ingredient profile and positioning its offerings beyond just a spread for bagels. Further, the firm has amassed about a 54% share of the North American dried ready meals category (primarily with its namesake macaroni and cheese brand), up 300 basis points from its prepandemic position. And it controls more than half of the North American processed cheese aisle, eclipsing the 6% share held by its next-closest branded competitor, Post. Beyond its dominance in these categories, Kraft Heinz also leads the North American chilled lunch kit category with almost 60% share, the North American cooking and table sauces segment with more than one-fifth share, and other condiments and sauces in North America with about one-third share.

As a byproduct of its intangible brand assets, we also believe Kraft Heinz has developed a cost advantage (though we don't think this edge would hold without its stalwart intangible assets). With an expansive domestic manufacturing and distribution network, we posit that Kraft Heinz operates with lower unit and distribution costs and greater supply chain efficiency than smaller peers. From our perspective, this gives Kraft Heinz dependable access to inputs that others may not have, enabling it to consistently fulfill orders promptly and serve as a reliable vendor for retailers reluctant to risk costly out-of-stocks. Moreover, we expect this position to enable Kraft Heinz to quickly replicate competitors' winning products while offering its fare at a lower price, thereby raising entry barriers for smaller operators with limited financial flexibility, high customer acquisition costs, and slotting fees. To quantify its edge, we calculate a direct operating margin by removing discretionary operating costs, such as advertising and R&D; noncash costs, including depreciation and amortization; and nonrecurring expenses to gauge manufacturing and distribution costs. Kraft Heinz’s direct operating margin stands at 28%, above the 26% average among the packaged-food firms in our coverage, supporting our view of the benefits of its cost position.

In our view, its leading market share positions, renewed commitment to reinvesting in its brands, and scale collectively merit a moat. But admittedly, ROICs, including goodwill, have been lackluster (averaging in the low- to midsingle digits, relative to our 7% weighted average cost of capital estimate). We attribute these dreary returns to past consolidation efforts, including the take-private deal for Heinz and the subsequent merger of Kraft and Heinz (which buoyed its goodwill and intangibles). However, we don’t think management hankers after resuming its role as a consolidator in the space, and we expect any future tie-ups will be smaller, bolt-on deals. As such, we perceive Kraft Heinz’s adjusted returns on invested capital, excluding goodwill, as more representative of the business’ prospects. In this context, we forecast returns, excluding goodwill, to approach high-single- to low-double-digit levels toward the end of our explicit forecast, supporting a narrow economic moat.

Reduced exposure to private-label-heavy categories (11% now versus 17% in 2019) and greater agility in responding to consumer trends should negate any lasting downdraft in volumes.

Kraft Heinz's decision to boost spending on its brands and capabilities is yielding higher returns, up 3.4 and 6 percentage points for promotions and advertising, respectively. This is enhancing its brand standing.

Its partnership with Disney could expand its reach in the lucrative away-from-home food channel (about 15% of sales) and elevate its shelf position through character tie-in promotions.

Inflation from coffee, eggs, and meats (exacerbated by tariffs) has yet to abate. Volumes may languish amid tempered consumer spending.

The prognosis for packaged food firms has soured on concerns around the appetite for less

healthy center-store fare, potential changes the administration could enact, and consumers' financial wherewithal.

From our vantage point, the added costs of improving the health profile of its mix (and, as such, removing artificial flavors and coloring) may increase its overall cost basket, constraining margins.