Kraft Foods Group’s New Products Support Revenue Growth

by Trefis Team
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Kraft Foods Group (NASDAQ:KRFT) is scheduled to announce its first quarter earning results on May 2. We expect the company’s top-line expansion to be driven primarily by its new products. We also expect the bottom-line to be negatively impacted by ongoing restructuring activities and changes implemented to its post employment benefit accounting assumptions last year, partially offset by soft commodity prices and productivity improvements.

New Products To Drive Revenue Growth

Kraft generated around 13% of total net revenue in 2012 from new products. The metric has improved significantly from around 6.5% in 2009. Just to emphasize, that implies incremental net revenues of approximately $1.2 billion during 2012. Revenue growth from new products can be attributed to both product innovation and higher marketing expenditure. In 2012, the company’s advertisement costs were up by around 20% y-o-y. Helped by an uneven allocation of R&D and marketing resources, the company has seen tremendous success in the new products launched over the last couple of years. This has translated into higher sales of several products sold under its Velveeta, MiO and Oscar Mayer brands. [1]

With a focus on innovation led by new products and backed by heavy marketing investments, Kraft is expected to drive positive growth from its new products in 2013 as well. MiO Fit’s Super Bowl debut with an ad featuring Tracy Morgan is one of the company’s biggest launch during the first quarter. It made sense for the company to invest heavily in this product as it belongs to the MiO family. MiO has been one of the most successful brands launched by the company in years. Its sales surged by 67% during 2012, and the MiO Fit launched earlier this year is expected to further energize the brand. Other products launched during 2013 include a zero calorie crystal light liquid drink mix in several flavors and two new additions to the popular Philadelphia cream cheese line-up.

Post Employment Benefits, Restructuring Costs To Impact Bottom-Line

Along with its 2012 fourth quarter financial update, Kraft announced some significant changes to its post employment benefits strategy including:

  • shifting to annual mark-to-market accounting for its post-employment benefit obligations, eliminating deferral and amortization of gains and losses associated with the plan assets,
  • adjusting actuarial assumptions used in the valuation of plan obligations such as discount rate and expected return on plan assets, and
  • increasing the weightage of debt securities in plan assets to 80% from 70% previously. [2]

Kraft also plans to spend around $300 million, or $0.33 per share, in 2013 on its ongoing $650 million restructuring program related to its spin-off from Kraft Foods Inc in October last year. [3]

A lower discount rate and an expected rate of return on plan assets due to increased weightage of fixed income securities in the plan’s asset mix are expected to result in higher costs associated with the company’s post-employment benefit plans. Higher restructuring costs are further expected to put downward pressure on the operating margins. However, productivity gains from its ongoing productivity initiatives and relatively soft commodity inflation seen during the quarter are expected to boost its bottom-line to some extent.

We have a $55 price estimate for Kraft Foods Group, which is around 7% above the current market price.

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Notes:
  1. Consumer Analyst Group Of Europe Conference, ir.kraftfoodsgroup.com []
  2. Q4 2012 Financial Update Release, ir.kraftfoodsgroup.com []
  3. Kraft Foods approves $650 million restructuring plan, www.reuters.com []
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