H.J. Heinz (HNZ) had a challenging second quarter, facing pressure on both top and bottom lines.

Revenue increased just 1% in the quarter, with 80% coming from developed markets that have seen a weak recovery. Sales volume saw a 3% decline, with particularly dismal results from Australia and ongoing weak traffic trends in the U.S.

Compounding the headwinds, gross margin for the quarter worsened by 180 basis points, weighed down by commodity inflation, which outpaced pricing and productivity gains. Heinz makes an extensive line of processed food products that includes condiments, meals, snacks and infant and nutrition products.

It competes with Kraft Foods (KFT), Tyson Foods (TSN), ConAgra Foods (CAG) and Campbell Soup (CPB).

See our full analysis for H.J Heinz Company.

Negative global volume

As consumers stayed cost-cautious about grocery spending amid a weak economic recovery, Heinz's global sales volume declined by 3%. To compete better with lower-priced private-label products, Heinz swiftly introduced smaller packaging and cheaper product sizes across its portfolio, targeting the low-income consumer spending less than $50 a week on groceries.

Still, it charged 3-4% more per unit volume in response to significantly higher input costs.

The major downside to Heinz's sales came from Australia and U.S. Foodservice, which contribute 10% and 12% of sales, respectively. Both segments suffered a volume decline in excess of 5%. While the Australian market suffered a retailer price war, U.S. Foodservice was stuck waiting for a pick-up in restaurant traffic. Yet, emerging markets provided some respite, delivering 16% organic sales growth led by China, India, Latin America and Indonesia.

Higher inflation expected

Gross margin for the quarter worsened by 180 bps, weighed down by commodity inflation, which outpaced pricing and productivity gains. More than half of the operating income decline came from dismal performance in Australia and U.S. Foodservice, which contributed 30% and 25% to the decline, respectively.

Commodity inflation touched a high of 10% for Heinz this quarter, representing more than 400 bps of margin in Q2. Even if the commodity prices soften for Heinz over the second half of the fiscal year, full year market inflation is still expected to reach 7.5%, that is 50 bps higher than the company's projections while entering the year.

We have a revised $54.73 Trefis price estimate for H.J. Heinz Company, which is around 8% ahead of the market price.