Heinz sales miss; updates forecast assumptions

Heinz sales miss; updates forecast assumptions

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(Global Markets) - H.J. Heinz Co (HNZ.N) is turning to smaller, less-expensive packages for its namesake ketchup and sauces and bringing baked beans back to the U.S. market as it tries to generate more sales in a tough economy.

The moves come as the foodmaker posted weaker-than-expected quarterly sales and lowered its expectation for its full-year gross margin. Its shares fell 3 percent.

The maker of Heinz ketchup, Ore-Ida frozen potatoes and other packaged foods cited sales weakness in Australia and its U.S. foodservice business, which it said hasn't recovered as quickly as expected.

In an effort to adapt to a more difficult operating environment, particularly in developed markets, Heinz said it will close three more factories around the world in addition to closings it already announced.

The closings will cost the company 15 cents more per share this year, on top of one-time charges of 35 cents per share already announced.

Heinz will also introduce a range of smaller-size, less expensive products in the United States that will give it a bigger presence in dollar stores, where cash-strapped consumers are doing more of their food shopping.

"Developed markets are experiencing low consumer confidence, high unemployment and economic uncertainty," said Heinz Chief Executive William Johnson.

Heinz's quarterly profit beat expectations by a penny, but it did not raise its full-year forecast. The earnings forecast also now relies on a lower tax rate than previously thought.

"Heinz trades at a premium to the group, and these are not premium results," said RBC Capital Markets analyst Edward Aaron.

The company's shares were down $1.68, or 3.2 percent, at $51.14 in late morning trading.

$1 KETCHUP, $2 FRIES

Heinz said net income fell to $237 million, or 73 cents per share, in its fiscal second quarter, ended on October 26, from $251.4 million, or 78 cents per share, a year earlier.

Excluding items, it earned 81 cents per share. On that basis, analysts on average were expecting 80 cents per share, according to Thomson Global Markets I/B/E/S.

Sales rose 8 percent to $2.83 billion, but fell short of analysts' average estimate of $2.91 billion.

Sales, excluding the effect of acquisitions and foreign exchange, rose 1.5 percent, as a 2.9 percent decline in volume partly offset a 4.4 percent benefit from higher prices.

To appeal to U.S. consumers with tight grocery budgets, Heinz is launching a 10-ounce pouch of ketchup for 99 cents, a nine-ounce package of mustard for 99 cents and a one-pound package of Ore-Ida French fries for $1.99.

CEO Johnson said the smaller packages are expected to boost sales since they should appeal to consumers who were not buying Heinz' products before, such as dollar store shoppers. They should also be largely neutral or beneficial to its profit margins, he said.

In addition, Heinz is bringing back its canned baked beans to the U.S. market after an absence of several decades.

"We believe this is the right time for the return of this convenient, nutritious, and value-oriented classic," Johnson said. "Consumers have been turning to comfort foods during the recession.

The company said it is on track to meet its goal for fiscal 2012 earnings of $3.24 to $3.32 per share, excluding items.

But compared with its assumptions in May, when it first gave the forecast, Heinz said it now expects a lower gross margin, due to higher commodity inflation and weak sales in Australia and U.S. Foodservice, offset by stronger results in emerging markets and Britain, reduced discretionary spending, lower interest expense and a lower tax rate.

In the latest quarter, sales from emerging markets rose nearly 16 percent organically and accounted for 20 percent of total sales.

Heinz said higher costs for ingredients like beans, sweeteners and packaging led to a 10 percent increase in costs in the second quarter, which it said was the "high water mark" for the year. It forecast a full-year commodity cost increase of 7.5 percent.

(Reporting by Martinne Geller; Editing by Derek Caney, Steve Orlofsky and Gunna Dickson)