Kraft Trims Jobs, Projects Profits - Analyst Blog
January 18 2012 - 10:35AM
Zacks
As Kraft Foods Inc. (KFT) moves ahead with its
spin-off plan, the company plans to slash the jobs of about 1,600
employees in North America in the year 2012.
According to Kraft, the move was imperative for the smooth
running of its businesses. The company also projects higher profits
than its earlier forecast for the fiscal year 2011.
Kraft had planned to spin-off its North American grocery
business and split itself into two independent public companies in
August 2011; a global snacks business and North American grocery
business. It stated its intent to split into a high-growth global
snacks business with estimated revenue of $32 billion and a
high-margin North American grocery business with estimated revenue
of $16 billion.
Global snacks will henceforth consist of the current Kraft Foods
Europe and Developing Markets units as well as the North American
snacks and confectionery businesses. The North American grocery
business would comprise the current U.S. Beverages, Cheese,
Convenient Meals and Grocery segments along with the non-snack
categories in Canada and Food Service.
Accordingly, about 40% of the job cuts will take place as a
result of reorganizing of the U.S. sales positions, while 20% of
the eliminations in U.S. and Canada will remain unfilled. However,
Kraft, which has about 46,500 employees in North America, out of
the total workforce of 127,000 employees worldwide, has decided not
to reduce its workforce at its manufacturing facilities
currently.
Though the job cuts have negatively affected the lives of many
employees, Kraft, on the other hand, is expected to benefit from
this planned reduced workforce, as it now expects its net revenue
to climb by about 10% for fiscal 2011 to reach $54.13 billion.
In addition, Kraft expects its 2011 operating earnings per share
of at least $2.28, up from $2.27 per share as projected earlier.
The company is also likely to invest more aggressively in its
brands.
As part of the other plans, Kraft plans to divide its grocery
sales business into two agencies of Acosta Sales & Marketing
for its grocery store and big box retailer sales, and Crossmark for
its convenience store sales. On the other hand, the company plans
to close two of its four U.S. management centers, while combining
its other offices across the country, making the East Hanover, New
Jersey facilities as the U.S. headquarters for its global snacks
business.
Further, Kraft’s beverages division, which is currently based in
Tarrytown, New York, and Planters, based in East Hanover, New
Jersey, will be moved to the Chicago area by December 2012, while
its Glenview, Illinois management center will be closed by the end
of 2013. However, most of the employees will be given an option of
transfer.
In December 2011, Kraft had also named the chief executive
officers (CEOs) and the chief financial officers (CFOs) for the two
companies that will be created after it splits into two entities
before the end of 2012.
Kraft had announced that the current CFO of Kraft, David
Brearton, will continue as CFO of the independent global snacks
company, whereas Kraft CEO Irene Rosenfeld will lead the global
snacks company as its CEO. The current president of the North
American foods division, Tony Vernon, would become the CEO of the
North American grocery business; and Timothy McLevish will be the
CFO of the North American grocery business upon the completion of
its planned split.
Kraft’s North American team has been streamlining its operations
since last year, and we believe that the job cuts will also bring
about cost reductions which are expected to benefit its margins.
However, it might happen that the spin-off would result in some
additional costs that could exceed the planned savings.
Besides, Kraft is facing challenges including higher commodity
prices and increasing packaging and distribution costs, increased
marketing expenses, and competition from private labels. Further,
the presence of tough competitors like Unilever
Plc. (UL) and ConAgra Foods Inc. (CAG)
also add to our concerns.
Currently, we prefer to rate the stock as Neutral. Further,
Kraft holds the Zacks #3 Rank, which translates into a short-term
Hold rating.
CONAGRA FOODS (CAG): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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