Mondelez Earnings: Not as Sweet as Its Cadbury Chocolate

Mondelez International (MDLZ 0.99%) reported its fourth-quarter and full-year 2015 results before the market opened on Wednesday. The global snack food giant, which was formerly part of Kraft Foods, turned in earnings and an outlook that investors didn't find so sweet.

Shares of Mondelez tumbled by more than 6% on Wednesday after earnings were released, and fell by more than 10% in the three-day period through Friday. The stock's 6.3% total return over the one-year period through Friday is still tastier than the S&P 500's and chocolate giant Hershey's (HSY 1.32%) losses of 6% and 15%, respectively, but falls short of packaged-food producer J.M. Smucker's nearly 15% return.

Mondelez's results: The key quarterly numbers

Data source: Mondelez.

Revenue for the maker of Cadbury chocolates and Oreo cookies, and other popular brands, came in ahead of analysts' expectations of $7.27 billion, though adjusted EPS fell short of the $0.48 consensus.

On a reported basis, revenue was negatively affected by 11.4 percentage points from the company's coffee business transactions in the previous quarter and 11.0 percentage points from changes in foreign exchange rates. Mondelez has experienced hurricane-force headwinds due to the strong U.S. dollar because about 75% of its business is generated outside of North America.

Organic net revenue, which excludes the currency impact, increased 4.7%, as the company raised prices to recover currency-driven input cost inflation in emerging markets.

The operating loss includes a $778 million charge for deconsolidating the Venezuela operations and a $313 million decrease to the coffee transaction pre-tax gain recorded in the third quarter. Reported EPS includes a negative $0.48 impact related to the Venezuela charge, a negative $0.19 impact from the adjustment to the coffee transaction gain, and a negative $0.09 impact from currency.

Product volume dropped again
The company's 4.7% increase in organic net revenue resulted from a 7.8% average price hike and a 3.1% decrease in volume.

What investors need to see soon is organic net revenue growth that isn't entirely driven by price increases. Price increases are great when consumers will accept them; Mondelez had mixed experience on this front in 2015. However, companies cannot continuously hike prices, as eventually many consumers will balk, and some of them will be lost forever to competitors. 

Losing market share in the chocolate category
Chocolate is an integral part of Mondelez's business, accounting for about 30% of its sales, second only to its biscuit category. Its chocolate brands, led by Cadbury and Milka, are immensely popular around the world. Mondelez, in fact, holds the largest share of the global chocolate market. 

Mondelez's organic net chocolate revenue (which is chocolate revenue on a constant-currency basis, and excludes contributions from any acquisitions made within the last year) increased just 0.9% from 2014 to 2015, much slower than the 5.4% growth in the overall global chocolate market, as the chart below shows. This means that the company lost market share in chocolates in 2015. (The same phenomenon occurred in 2014, when its chocolate revenue grew 1.6% vs. the category's 3.7%.)

Image source: Mondelez. Data source for 1 and 3: Nielsen. Share performance is the percentage of revenue with share either increasing or holding steady versus the prior-year period. (Don't get bogged down with this data category, as it's not as important as the other two for our purpose.)  

One reported reason that Mondelez lost ground in chocolates is due to a "price gap." The company increased chocolate prices in 2014 because of rising input costs. Competitors didn't raise their prices for some time after, so Mondelez lost some share while this price gap lasted. Additionally, some retailers, particularly in Europe, didn't accept these price increases. These are reasonable explanations, as the company's performance in the chocolate category did improve in the second half of 2015, according to information shared on the conference call.

That said, this situation demonstrates that Mondelez doesn't have strong pricing power in its chocolate category, particularly in Europe, its largest chocolate market. So, it's going to need to find a way to grow revenue by also increasing product volume. While we're just talking chocolates here, this point is applicable to the entire business.

Hershey, which reported its fourth-quarter results in late January, is in a similar situation. Its organic net revenue fell 4.6%, which included a negative 1.9% currency impact. Hershey's volume fell 4.5%, while it received a 1% benefit from price increases.

Looking forward
Mondelez provided an updated 2016 outlook and a 2018 margin target. Here are its expectations on a pro forma basis: 

Data source: Mondelez.

Analysts pared back their quarterly and full-year 2016 estimates after earnings and an updated outlook were released. The current consensus for Q1 is adjusted earnings of $0.44 per share on $6.63 billion in revenue, representing earnings growth of 7.3% on revenue contraction of 14.6%. For full-year 2016, Wall Street now expects adjusted earnings of $1.94 per share on revenue of $27.55 billion. This represents EPS growth of 10.9% on revenue contraction of 7.1%.