Kraft Foods Group Earnings: Lack Of Guidance Causes Uncertainty

KRFT: Kraft Foods logo
Kraft Foods

The Kraft Foods Group‘s (NYSE:KRFT) fourth quarter earnings saw a decline in net income despite revenue growth, as well as changes in management. [1] Chairman John Cahill took over the mantle of CEO, and as a result the company did not offer guidance for the coming year. Cahill cited a honeymoon period to get a better understanding of the company’s current situation. Further guidance will also have to await the formulation of a strategy to stem the company’s market share declines and better manage costs.

We have a price estimate of the Kraft’s stock of $63, which is about in line with the current market price.

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Unfavorable Commodities Countered With Price Hikes

We had written in our earnings preview that most of the commodity prices that are important for the company saw unfavorable fluctuations in Q4. To counter the adverse impact on its margins, Kraft has hiked the prices of several of its products. Combined with lower manufacturing costs and productivity improvements, this has countered the cost inflation due to commodities. This hike in prices added 1.2 percentage points to the company’s organic net revenue growth. [2]

Which Segments Helped Grow Revenue?

Kraft’s organic revenue growth was aided by an 8% year on year increase in Cheese segment revenues. With revenues of $1.17 billion, the segment was also the largest contributor to the company’s revenues in Q4. The increased revenues for the division were a result of the company’s pricing action in response to commodity price increases. There was a reduction in sales volumes due to the price elasticity of demand, but its impact on revenues was milder than that of the price hikes. [2]

The refrigerated meals segment was another large contributor to the revenue growth. In Q4, it increased its revenues by 6.3% year on year to $793 million. Revenue growth was driven by products in the Lunchables franchise and innovative products such as the P3 Portable Protein Pack. [2]

Costs Savings Augment Revenue Increases

The company’s revenue growth was aided by cost savings due to an improvement in productivity. Gross productivity was up 5% in Q4. Further, management has opined that there are more opportunities for increasing productivity through cost reductions that do not affect sales.

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More Trefis Research

  1. Kraft’s 2014 Q4 Earnings Call Transcript []
  2. The Kraft Foods Group Investor Relations Page Containing The Q4 Earnings Report [] [] []