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Kraft Misses on Earnings & Revs Again

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Kraft Foods Group, Inc.’s (KRFT) fourth-quarter 2013 revenues and earnings fell shy of Zacks Consensus Estimate. However, both increased year over year helped by easier year-ago comparisons. Despite Kraft’s expectations to meet the long-term targets this year, it expects the first quarter to be soft.

Kraft’s fourth-quarter 2013 adjusted earnings per share of 43 cents missed the Zacks Consensus Estimate of 61 cents by almost 30%. Adjusted earnings, however, significantly increased year over year due to volume/mix gains and lower costs. In the year-ago period, adjusted earnings stood at 41 cents per share.

Adjusted earnings exclude the market-based impacts of post-employment benefit plans. Including this item, reported earnings of $1.54 per share improved significantly from prior-year quarter’s earnings of 15 cents due to pension-related gains.

Kraft Foods Group spun off from Mondelez International Inc. (MDLZ) into an independent company in Oct 2012, and consists of the North American grocery business of the old Kraft Foods.

Revenue Discussion

Kraft’s fourth-quarter net revenue increased 2.3% year over year to $4.60 due to easier year-ago comparisons. The top line, however, slightly missed the Zacks Consensus Estimate of $4.65 billion.

Organic revenues (excluding the impact of currency and sales to Mondelez) grew 3.2% as volume gains offset lower pricing. Also, organic revenue growth was well above the 0.6% growth in the North American food and beverage industry; consistent with management’s expectations.

Volume/mix benefited revenues by 4 percentage points (pp), much better than last quarter’s negative impact of 3.1 pp. Volume/mix gained due to a benefit of about 3.0 pp from easy year-ago comparisons which included lower volumes due to retail inventory reductions following the split last year. Also, strong performance of beverages and refrigerated meals pushed up volumes.               

Pricing declined 0.8 pp, hurt mainly by lower commodity driven pricing in coffee and raw nuts. Product pruning created headwinds of 1.0 pp.


Adjusted operating income (excluding market-based impacts to post-employment benefit plans and restructuring costs) increased 24.5% to $771 million driven by volume/mix gains, lower overhead costs and productivity savings.

The effective tax rate was 33.0% in the fourth quarter of 2013, higher than 31.8% last year.

Segment Details

Beverage business revenues improved 5.5% (both reported and organic) to $597 million in the quarter due to volume/mix gains. Volume/mix grew 10.5 pp due to easy comparisons with spin-off retail inventory reductions last year. Successful innovation in on-demand coffee also boosted volumes. Pricing declined 5.0 pp due to lower commodity-driven pricing in coffee.

Cheese business revenues declined 1.6% (down 1.4% organically) to $1.07 billion in the quarter due to lower pricing and a product recall in string cheese. Pricing declined 2.7 pp in the quarter. Volume/mix increased 1.3 pp due to easier comparisons with spin-off related shipments in the comparable period last year. Kraft and Cracker Barrel natural cheeses and Philadelphia cream cheeses did well in the quarter.

Refrigerated Meals business revenues improved 7.3% (both reported and organic) to $746 million driven by both volume and pricing growth, Volume/mix increased 5.0 pp while pricing went up 2.3 pp. Easier comparisons, gains from Lunchables and cold cuts innovation and higher bacon pricing boosted the top line in the quarter.

Meals & Desserts business revenues improved 5.7% (both reported and organic) to $671 million mainly due to pricing gain of 5.7 pp. Volume/mix was, however, flat. Pricing increased due to lower promotional activity compared to last year.

Enhancers & Snack Nuts business revenues improved 0.6% (1.0% organically) to $494 million mainly due to volume/mix gain of 6.5 pp. Pricing declined 5.5 pp.

Volumes gained from easier year-ago comparisons. Encouragingly, the improvement seen in Planters snack nuts in the third quarter continued in the fourth. Planters turned around after being sluggish until the first half of 2013 due to increased advertising and innovation. Lower nut costs and increased merchandising activity behind Miracle Whip salad dressing spread led to lower pricing.

Canada business revenues declined 1.1% to $541 million. However, organically revenues increased 5% due to volume/mix gains. Volume/mix increased 7.3 pp due to easier comparisons and gains in cheese and Tassimo coffees. Pricing declined 2.3 pp due to lower prices for nuts.

Other Business revenues decreased 1.1% (down 1.6% organically) to $467 million due to volume/mix decline of 0.8 pp. However, pricing increased 2.4 pp.

Annual Results

In fiscal 2013, total revenue declined 0.3% to $18.22 billion, slightly short of the Zacks Consensus Estimate of $18.28 billion. Organically, revenues were flat.

Adjusted earnings were $2.61 per share which missed the Zacks Consensus Estimate of $2.79.

Fiscal 2014 Outlook

Though the company does not issue any specific annual guidance, it expects its 2014 results to be in line with its long-term targets.

Management’s long-term growth targets include organic sales growth at or above market growth of the North American food and beverage industry, mid single-digit operating income growth and mid to high single-digit earnings growth.

However, management did indicate that the first quarter of 2014 could be soft due to shift in Easter timing to the second quarter. Also, a weak holiday sell-through resulted in higher inventory with retailers and they may not be willing to buy much in the first quarter. Moreover, the North American food industry is facing headwinds from a weak job market and the recent cut in federal food assistance offered through the Supplemental Nutrition Assistance Program, formerly known as food stamps.

Kraft carries a Zacks Rank #2 (Buy). Kraft has been struggling with its top line ever since the split from Mondelez. Mondelez also missed the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter due to category challenges and slowdown in emerging markets. Other food companies that have been struggling with the top line since the past few quarters are Kellogg Company (K) and General Mills, Inc. (GIS). Both these companies’ sales have been hurt by their choppy sales business.

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