Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Break out the Champagne, er, Oreos

Mondelez shareholders cheered the snack maker's earnings on Wednesday, which showed improving profits that topped Wall Street's expectations and increased confidence in the company actually cutting $3 billion in costs as promised. Shares rose as much as 5.5 percent. 

Tasty Snacks
Shares in Mondelez are up 20% in the last year, compared to a 1% drop in the S&P 500
Source: Bloomberg

The company has shifted production to lower-cost countries, sold off less-profitable brands, and raised prices. It sprinkled the magic words "zero-based budgeting" throughout the script of its earnings call with investors -- popular jargon for starting a budget from scratch and justifying each cost every period. In other words, the maker of Chips Ahoy cookies and Ritz crackers is following the "activist investor in food business" playbook to a T. (Pershing Square's Bill Ackman or someone must have written something like that at some point, right?)

Investors in the company are right to cheer.

Mondelez has provided shareholders with a win-win scenario: If the company succeeds in cutting the fat out of the business, then Mondelez becomes more productive, potentially delivering healthy long-term returns. It also becomes a more attractive takeover target for packaged food companies starving for deals -- creating a potential windfall for shareholders.

If the company's cost-cutting efforts fail, then that will also be okay. That's because a struggling Mondelez will no doubt drum up more interest from activist investors such as Ackman (who has been trimming his stake in the company and currently owns 1.5 percent) and Nelson Peltz (whose Trian Partners has a 3.25 percent stake in the company), or deal makers such as 3G Capital, which made slashing expenses in the bloated food industry en vogue through purchases of Kraft Heinz and Burger King. (According to my colleague Tara Lachapelle, it's only a matter of time until 3G strikes again with another acquisition.

Right now it looks like Mondelez, which split from Kraft in 2012, would prefer to avoid more activism. CEO Irene Rosenfeld has been defiant that she can make it without the help of activist investors and on Wednesday called the quarter's performance "a good start to the year."  

While some financial metrics show the company's profits are rising, it's difficult to really determine by how much -- Mondelez's operating results were impacted by a number of items that make it especially hard to compare results from period to period, such as divestitures, restructuring charges, and currency effects.

Profiteering
Mondelez's adjusted net income increased by 12.5 percent from the year before
Source: Bloomberg
Note: Mondelez's adjusted net income was impacted by a number of items that make it hard to compare results from period to period, such as divestitures, acquisitions, restructuring charges, and currency effects.

For its part, the company said its adjusted currency-neutral operating income rose by 20 percent in the quarter from the year before. If you just use reported numbers, which aren't adjusted for currency impacts and other changes, its operating income fell by 11 percent from the year before. 

Not Out Of The Woods Yet
Year-over-year growth in Mondelez's operating profits
Source: Bloomberg Intelligence

Even if the company's adjusted numbers paint the most accurate picture, the company has a ways to go when it comes to cutting costs far enough to make it more productive. And it still has to manage the other side of the profit equation -- boosting sales in a challenging environment.

Mondelez continues to face shaky consumer demand in countries such as Brazil, Russia, and China, as well as headwinds from currency impacts. And the snack business is not doing so hot in mature markets such as the U.S., where customers are choosing healthier fare. Success with its new thin Oreos might not be enough to really juice sales much.

The company on Wednesday reaffirmed its earnings guidance and said it was still on track to hit its operating income margin target of 17 percent to 18 percent in 2018. It's a lofty goal. But even if the company isn't able to deliver, that might just be okay for shareholders, too. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net