Kraft Beats Earnings, Rev; Keeps View

Zacks

Kraft Foods Group, Inc. (KRFT) reported solid first-quarter 2013 results beating the Zacks Consensus Estimate for both revenues and earnings on the back of solid innovation and stepped up advertising spend behind its biggest brands. The company also stood by its full year 2013 outlook.

Kraft’s first-quarter 2013 adjusted earnings per share of 88 cents breezed past the Zacks Consensus Estimate of 65 cents by 35% driven by better-than-expected top line performance. Adjusted earnings were flat year-over-year.

Adjusted earnings excluded charges related to Kraft’s 2012-14 restructuring program which aims to aggressively reduce costs and improve efficiencies. Including the restructuring charges, reported earnings stood at 76 cents, down 7.3% from prior year quarter’s earnings of 82 cents.

Kraft Foods Group was spun off from Kraft Foods, Inc into an independent company last year in October. Kraft Foods Group includes the North American grocery business of the old Kraft Foods which has been renamed to Mondelez International (MDLZ), but now comprises only its global snacks business.

Revenue Discussion

Kraft’s first-quarter net revenues grew 2.1% year over year to $4.55 billion driven by strong product innovation and increased brand building and advertising investments. Revenues also beat the Zacks Consensus Estimate of $4.487 billion.

Organic revenues (excluding the impact of currency and sales to Mondelez) also increased 2.1% driven by volume gains and improved product-mix which offset headwinds from lower pricing and product pruning. Volume/mix benefitted revenues by 2.4 percentage points (pp), much better than last quarter’s negative impact of 7.9 pp. The new company however, was not much successful in raising prices with pricing declining 0.3 pp, worse than last quarter’s 0.7 pp gain. An early Easter (which moved sales to the first quarter from the second) added between 0.5 and 1 pp of growth, while product pruning created headwinds of 0.7 pp.

Adjusted operating income (excluding restructuring charges) increased 16.6% in the first quarter driven by solid top-line growth. Strong productivity gains and cost savings also boosted profits making up for double-digit increase in the advertising costs. In the upcoming quarters, Kraft expects to invest a significant portion of its cost saving on brand building investments in order to protect the market share of its biggest brands.

Segment Details

Kraft includes products in the beverages, cheese, refrigerated meals and grocery food categories. All the business segments showed positive organic growth, except grocery, in the quarter.

The Beverage business’ revenues improved 1.8% (both reported and organic) to $721 million in the quarter largely due to volume/mix gains. Volume/mix grew 7.3 pp due to strong performance of the Kool-Aid and Capri Sun franchises. However, pricing declined 5.5 pp due to lower green coffee costs.

The Cheese business’ revenues improved 6.9% (up 5.5% organically) to $996 million in the quarter largely due to volume/mix gains. Volume/mix grew 6.1 pp due to increased demand for Kraft natural cheeses and Velveeta cheese slices. Price however, declined 0.6 pp in the quarter.

Refrigerated Meals business’ revenues improved 2.4% (both reported and organic) to $826 million in the quarter as improved pricing offset declines in volume/mix and headwinds from product pruning. Volume/mix declined 0.3 pp while price added 2.7 pp to top line. Lunchables reflected a strong growth trend, up in the mid single-digits driven largely by innovation and increased advertising investments.

The Grocery business’ revenues declined 0.2% (down 0.4% organically) to $1.08 billion as volume/mix declined 2.1 pp while pricing added 1.7 pp. Brands like Velveeta dinners and Kraft Macaroni & Cheese gained from increased innovation. However, brands like JELL-O ready-to-eat desserts, Kraft dressings and Planters snack nuts were sluggish in the quarter.

The International & Foodservice business’ revenues declined 0.1% to $925 million. However, organically revenues improved 1.7% due to volume/mix growth of 2.3 pp. Pricing however, declined 0.6 pp.

Fiscal 2013 Outlook Maintained

The company maintained its previously provided outlook for 2013. Organic revenues are expected to be in line with long-term growth rates i.e., equal to or above the North American food and beverage industry’s growth rate. The top-line guidance includes a negative impact of up to 1 pp from product pruning in North America.

For 2013, reported earnings are expected to be about $2.75 per share, including restructuring costs of approximately $300 million or 33 cents per share. The company incurred $120 million of re-structuring charges in the quarter and expects to realize two-thirds of the costs in the first half. Management now expects earnings growth to be equally divided between the two halves of the year. Earlier management expected earnings to be more back-half weighed with 48% to be realized in the first half and 52% in the later half.

Kraft Foods carries a Zacks Rank #2 (Buy). Overall, we are encouraged by Kraft’s aggressive cost reduction and efficiency-improvement initiatives which provide more cash to invest in stronger innovation and brand building and marketing initiatives. Kraft also aims to maximize cash flows which will be used to pay strong and competitive dividends.

Other Stocks to Consider

Some other food companies you may want to consider include Flower Foods Inc. (FLO), with a Zacks Rank #1 (Strong Buy) and J&J Snack Foods Corp. (JJSF) with a Zacks Rank #2 (Buy).

Read the Full Research Report on MDLZ

Read the Full Research Report on JJSF

Read the Full Research Report on FLO

Read the Full Research Report on KRFT

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