Kraft Foods Earnings Spot On But Restructuring Impacts Profitability
Kraft Foods (NYSE:KFT) announced its Q1 results on Thursday. Net revenues rose 4.1% to $13.1 billion whereas operating income grew 2.7% to $1.69 billion. Operating margin for the quarter stood at 12.9% compared to 13.1% in the previous year period. The drop in margins is primarily attributable to restructuring and integration costs. However, excluding the effect of one-time events, operating margins improved to 14.1% from 13.9% as the company benefited from lower SG&A and passed on the higher costs to consumers. [1] Net income for the quarter was $819 million, or an EPS of $0.46. Globally, Kraft competes with players like PepsiCo (NYSE:PEP), General Mills (NYSE:GIS) and Kellogg (NYSE:K).
We have lowered our price estimate for Kraft Foods to $39.92 , primarily due to a sudden jump in its short-term borrowings.
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New Products and Developing Markets Impress
Total sales were buoyed by the launch of new products such as MiO water enhancer, belVita biscuits, and Milkbite granola bars. Cheese sales were helped by a change in marketing strategy for Philadelphia Cheese which focuses on cheese being used as a recipe product. The company launched marketing campaigns in Europe focusing on how Philly could be used as a cooking ingredient, in addition to being used as spread. In addition, the company also launched Philly Indulgence in the U.S. in 2012 which has generally received positive reviews.
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Sales in developing markets grew more than 8% to $3.93 billion helped by geographic expansion and the launch of a greater number of its products. Kraft is benefiting from increased network with the acquisition of Cadbury. For example, in Ukraine, it was able to use its existing distribution networks to make its Cadbury portfolio available in 75,000 retail outlets. Similarly, in India, Kraft was able to make Oreo and Tang available in more than 300,000 retail outlets within 60 days of launch.
Later this year, Kraft will split into two companies i.e. the North American Grocery division and the Global Snacks division. It will rename the latter as Mondelez.
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