Kraft Foods Earnings Will Show Global Growth With Weaker Margins

KFT: Kraft Foods logo
Kraft Foods

Kraft Foods (NASDAQ:KFT) will announce its Q2 earnings on Thursday, August 2. The stock has had a tepid year so far, rising by around 5% since the beginning of the year. Top-line growth is likely to be driven by international operations and a slew of new products launched in the U.S. earlier in the year. In 2011, revenues generated due to new product introductions stood at 10% of total revenues vs. 9% a year ago, which means an incremental revenue of $1.1 billion. The major products introduced in 2012 so far are MilkBite, belVita and Philadelphia Indulgence. The performance of these products will be critical to overall revenue growth.

We currently have a $40 price estimate for Kraft Foods, which is in line with the current market price.

Developing markets now contribute more than 30% to Kraft’s total revenues. The food & beverage giant has seen strong growth in the Middle East, China and India in the recent past. Earlier in the year, Kraft announced that it will double the capacity of its Nabisco Arabia plant (in Saudi Arabia) which produces Oreo cookies, Ritz crackers and belVita biscuits at a capital expenditure of $16 million. Kraft is also targeting Israel’s chocolate industry, estimated to be growing annually at 8%. In China, the focus is on creating products suited to the local tastes. Oreo cookies in flavors such as green tea ice cream, mango and mandarin orange are already present in the country. The company will soon launch Ritz crackers in new flavors named ‘fantastic beef stew’ and ‘very spicy chicken’. Besides launching new products, Kraft also plans to step up marketing and widen its distribution channels in the country.

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Profitability to Get Hurt by Spin-Off/Restructuring Expenses

However, profits will be affected by the expenses related to spin-off and restructuring. In the first quarter, the company incurred $39 million in costs related to the spin-off. Kraft will split up into two companies later this year and expects to incur a total of $1.7 billion one-time cost related to the spin-off. Kraft is also in the midst of a restructuring process, which will go on till 2014. The restructuring primarily involves lay-offs and asset disposals, and the company expects one-time cost of $1.1 billion for the restructuring program. Kraft incurred $79 million in expenses in connection to the restructuring program in the first quarter.

The company is also involved in an integration program with Cadbury, which will go on till the end of 2013. The total cost of this program is around $1.5 billion, and the company incurred $43 million in costs related to the integration program. However, stronger pricing might help the company offset some of these one-time costs. In the first quarter, pricing gains to the tune of 5.5% helped partially mitigate the rise in total costs.

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