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H.J. Heinz Co. (NYSE: HNZ): Good Things Come in Small(er) Packages

By Chad Fraser on February 21, 2012

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Last week saw the release of both the January U.S. inflation numbers and the latest earnings from many big food makers, including H.J. Heinz Co. (NYSE: HNZ), which reported its latest results on Friday.

The Labor Department’s latest figures showed inflation ticking up by 0.2% in January, pushing up the core rate to 2.3% over the last 12 months. One of the key drivers was the rising cost of food, which was up 4.4% in the last year.

Higher Costs, Weak Economy Put Food Makers Like H.J. Heinz Co. in a Tough Spot

That figure weighed on the profits of a number of big U.S. food companies, which have been steadily raising their prices in the past year as they struggle to pay higher costs for wheat and other ingredients.

One of the more shocking price increases came from J.M. Smucker (NYSE: SJM), which raised the price of Jif peanut butter by 30% from a year ago. Said CEO Richard Smucker: “There’s a bit of sticker shock on our promoted prices from last year, and the consumer needs to adjust to those.” 

Judging by the stock’s 8% dive after Smucker reported disappointing results on Thursday, investors are betting the adjustment may take longer than the company thinks.

H.J. Heinz Co. Earnings Beat the Street—but Challenges Remain

For its part, H.J. Heinz Co. raised the prices on its pasta sauces, canned potatoes and ketchup in North America in 2011. That translated into a 1.1% dip in its sales on the continent in the quarter ended January 25, 2012, to $838 million. Sales volumes fell 2.0%.

Despite that, the company’s overall sales rose 4%, to $2.91 billion from $2.72 billion a year ago. Earnings gained 4.7%, to $284.7 million, or $0.88 a share. Without unusual items (mostly restructuring costs), the company earned $0.95 a share, far better than the Street’s estimate of $0.85.

Emerging market sales were a highlight, with organic growth (excluding the impact of currency fluctuations and acquisitions and divestitures) of 19.8%. Global ketchup sales climbed 8.8%.

Investors, perhaps breathing a sigh of relief after Smucker’s results, sent Heinz shares up 4.55% on Friday.

H.J. Heinz Co. Takes Aim at Price-Conscious Consumers

At Forbes.com, deputy editor John Dobosz pointed to Heinz’s move toward smaller packaging as one of the factors that is helping it compete in a tough North American market. Dobosz boiled the strategy down succinctly: “Heinz is going to smaller packaging. People can’t pay as much, so we’ll give them less of it and charge them less. Works for Heinz.”

Among the smaller products that H.J. Heinz Co. is now in the process of launching is a 10-ounce size of ketchup in “stand-up pouch packaging” that will sell for $0.99. It’s also planning to sell a one-pound version of Ore-Ida french fries for $1.99.

SeekingAlpha contributor Justin Weinstein also liked the company’s increasing focus on emerging markets (which now account for 20% of its overall sales) and its ongoing efforts to control its costs. He wrote:

“From an investor perspective, the company is poised for extended growth into the coming years from emerging markets, which will yield top-line improvements. Through the company’s efforts to cut costs and close as many as eight production facilities, HNZ is preparing to improve its bottom line through savings.”

The kicker? As Weinstein points out, Heinz pays dividends at an annual rate of $1.92 a share, for a high 3.5% yield. That matches the yield of Campbell Soup (NYSE: CPB) and is ahead of Kraft (NYSE: KFT), which yields 3.1%.

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