Dive Brief:
- Kraft Heinz has disclosed an investigation by the U.S. Securities and Exchange Commission into its procurement accounting and control policies in its latest earnings report, released Thursday evening.
- The SEC subpoenaed Kraft Heinz in October as part of an investigation into its procurement practices, and the company cooperated and conducted its own investigation. Kraft Heinz found $25 million should have been recorded in previous quarters.
- The company wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, resulting in a $12.6 billion net loss. The quarter was difficult because of unanticipated inflation and supply chain issues, CEO Bernardo Hees said in the report.
Dive Insight:
The SEC investigation was repeatedly dismissed by company leaders on the earnings call and in the report as immaterial. The $25 million makes up only a tiny fraction of total procurement costs; Knopf noted in the earnings call that the company has a total procurement spend of $11 billion annually.
Even though the investigation was relatively inconsequential, an investigation by itself can be enough to send shares into a tailspin. After Hain Celestial reported accounting inconsistencies leading to an internal investigation in 2016, its stock plunged as much as 27.5%.
Kraft Heinz has used zero-based budgeting — starting with a clean slate of expenses that need to be justified each quarter instead of sticking with a prevailing plan — to boost margins since the two CPG giants merged in 2015. But the problems had nothing to do with that strategy. In the earnings call, Hees stressed the problem came from the supply chain and operations, though it's unclear how already-existing supply chain problems could snowball into such a large write-down in a single quarter.
Some of the cracks in Kraft Heinz's financial foundation were visible in the company's previous earnings report, when modest sales increases were reported but shareholders saw a 33.3% net loss. Inflation, supply chain and marketing costs all were ticking upward in the third quarter, gobbling up net revenues.
It seems like there's nowhere for Kraft Heinz to go but up. And company leaders are definitely aiming there. In fact, listening to them speak on the earnings call makes it seem like the terrible numbers, the enormous write down and the SEC investigation are not even current problems. Knopf said the company anticipates a "step backwards" this year, but is confident in future profit growth through fully leveraging brands, costs and capabilities.
