Heinz: In the Soup, or on a Roll?


By David Shook Many H.J. Heinz (HNZ) shareholders have to be wondering these days if there's really a light at the end of the hot dog bun for the venerable food-processing giant. Remarkably, despite a multiyear turnaround effort, Heinz has had 24 charges against earnings in the last 26 quarters. "That must be some kind of record," says Bank of America Securities analyst William Leach. "It has just been endless restructuring programs to try to cut costs and improve the business mix." Heinz stock, trading at around $30, is down 25% over the past year.

Like many big food companies, Heinz has had difficulty showing revenue growth in recent years. Cheaper store labels have taken market share from the established premium brands, and new-product development in the food business is as tricky and costly as ever. And some analysts rolled their eyes last December when Heinz spun off its tuna and pet-food businesses -- two of its highest-grossing divisions -- to Del Monte (DLM).

"DEAD WEIGHT" GONE. Yet, it's possible that the worst could finally be behind Heinz, which is determined to get back to basics. Today, its famous tomato ketchup accounts for approximately 30% of $2 billion in quarterly sales. "These restructurings have been going on for three to four years, but I think that's a reflection of how much dead weight there was to cut," says Midwest Research analyst Christine McCracken, who has a buy rating on the stock.

"I think people don't realize that this company, over many years, had cobbled together a messy portfolio of businesses," says Leach, "and the recent restructurings and asset sales will make Heinz healthier." He says the businesses were sold to Del Monte on the cheap, but the costs associated with keeping them profitable were high.

Heinz's strategy is to rely on condiments and a huge frozen-foods business, including Ore-Ida french fries, while increasing international sales in Europe and Asia. Heinz CEO William Johnson, whose brusque style isn't well liked on Wall Street, expects that the 15 so-called "power brands" will be the basis of its new slimmed-down business plan. Products in those categories include Smart Ones frozen entrees, Bistro Selection frozen dinners, Heinz "Bite Me" frozen snacks aimed at European teenagers, Boston Market HomeStyle Meals, and the new EZ Squeese upside-down ketchup bottle that's perhaps the most hot-dog-friendly ketchup dispenser ever.

MODEST PERFORMANCE. Together, the 15 brands account for two-thirds of sales. "The charges over the past few years all relate to some major restructuring initiatives that we began after refocusing our business in 1998 and 1999," says Heinz spokesman Jack Kennedy. "Those initiatives, for the most part, are behind us. And we've said that any charges associated with the sales to Del Monte should be completed by the end of fiscal 2003." At Heinz, that means the end of April.

In third-quarter results released on Mar. 11, Heinz reported modest performance, with net income of $151.6 million, or 43 cents per share, vs. $201.7 million, or 57 cents a share, the year earlier. (The decline was due mainly to the void left by the assets sold to Del Monte.) Sales for the quarter grew by 9%, however, driven by higher pricing and favorable exchange rates, but were offset by a 1.9% decline in volume.

The good news came in the 15 core brands: U.S. ketchup sales IN grocery stores grew by 3.3% for the quarter, giving Heinz a record 60% share of the market, thanks to the innovative squeeze bottle. In Canada, Heinz nabbed a lucrative contract to supply ketchup in McDonald's (MCD) restaurants. And in Europe and Asia, overall sales increased between 14% and 15% for the quarter. In Europe, Heinz is launching new Salad Helpers tuna products as well as a range of biscuits in the shape of Disney's beloved Winnie the Pooh characters.

UNFAIRLY "PENALIZED"? The reason some analysts believe the stock could be a nice pick is that it's trading at a 17% discount to other comparable packaged-food outfits, according to McCracken. That in itself isn't unusual, "but that discount had been predicated on the underperforming businesses, which were sold to Del Monte," McCracken says. "In my mind, there's no real reason anymore for the discount. I think the stock is being penalized for the company's past actions."

As Leach notes, Heinz's repeated restructurings have been a source of endless frustration for many investors. And with so many one-time hits against earnings in recent years, it doesn't have much credibility on Wall Street. But if the Del Monte deal is the final piece in a multiyear rebuilding, Heinz's stock may finally catch up to its peers. Shook covers the markets for BusinessWeek Online


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