Kraft Foods Tops EPS; Sales Lag - Analyst Blog
August 03 2012 - 5:00AM
Zacks
Kraft Foods Inc.'s (KFT) second quarter adjusted earnings of 68
cents per share (excluding integration, spin-off and restructuring
charges) beat the Zacks Consensus Estimate by 2 cents and the
prior-year quarter’s earnings by 6 cents per share. The top-line
performance was weak during the quarter. However, pricing and
productivity gains offset the impact from top-line’s weak
performance and eventually led the packaged food maker’s second
quarter earnings higher.
Revenues and Margins
Revenues in the quarter declined 4.3% to $13.3 billion, missing
the Zacks Consensus Revenue Estimate of $14.08 billion. Foreign
currency fluctuations against a strong dollar is pulling down
revenues of most of the companies that have significant business
outside U.S. Kraft Foods is no exception with this regard, and this
headwind primarily dragged the revenues down. Lower volumes due to
an early Easter and difficult year-over-year comparisons due to
accounting calendar changes in the prior year also hurt the top
line. Organically, revenues were up 3.4%, driven mainly by pricing
gain and strong performance of the power brands.
Pricing, in response to higher input costs, added 4.0 percentage
points to top-line growth. Volume/mix and currency pulled down
revenues by 0.6 percentage points and 5 percentage points
respectively. The shift of Easter-related shipments into the first
quarter and product pruning in North America hurt volumes in the
second quarter. Kraft’s 21 Power Brands grew 6% in the second
quarter.
Adjusted operating income improved 8.3% to $2.1 billion in the
quarter despite the revenue shortfall, driven by pricing and
productivity benefits. Adjusted operating margin expanded 180 basis
points to 15.8%.
Regional Details
North America: Revenue increased 1.2% to $6.4
billion. Organically revenues increased 1.7% driven by higher
pricing and power brand growth. The 15 Power brands in North
America grew more than 5%. Volume/mix was however down 2.0% due to
headwinds from the Easter shift product pruning.
Adjusted segment operating income increased 9% in the quarter
driven by higher pricing, productivity gains and reduced overheads
which offset volume/mix and input cost headwinds.
Europe: Revenues declined 14.8% in the second
quarter to $3.0 billion, pulled down largely by currency impact and
accounting calendar changes. However, organic revenues were up 1.4%
despite volatile market conditions, mainly helped by pricing
actions, which added 2.5 percentage points to top-line growth.
Volume/mix declined 1.1 percentage points mainly due to the Easter
shift. The 15 Power Brands grew 3% in the quarter.
Adjusted segment operating income (excluding currency and
accounting calendar changes) was up in mid single digits despite
the revenue shortfall on the back of productivity benefits and
overhead leverage.
Developing Markets: Revenues declined 3.6% to
$3.9 billion. It were yet again the currency fluctuations and
accounting calendar changes that affected these revenues. Organic
revenue however increased 7.6% in the quarter, helped both by
pricing (added 5.7%) and volume (added 1.9%) gains. The 10 Power
Brands in the developing markets grew more than 8%.
Adjusted segment operating income (excluding currency impact and
accounting calendar changes) grew in high single digits in the
reported quarter, driven by positive volume/mix and cost
management
2012 Outlook
Kraft reaffirmed its constant currency revenue and earnings
guidance. Kraft Foods expects organic revenue to grow approximately
5% in 2012, including a negative impact of up to 1 percentage point
from product pruning in North America. The guidance assumes a
diminishing impact from pricing in the second half.
Kraft expects 2012 operating earnings to increase to at least
the lower end of its long-term guidance of 9-11% (constant
currency). Benefits from cost control and Cadbury integration
synergies will be partially offset by a higher effective tax rate
(approximately 28%) and a 4 percentage point headwind from pension
costs.
Spin-Off on Track
Kraft Foods is in the process of separating into two independent
public companies: a global snacks company and a North American
grocery company. Global snacks will 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, to be spun-off from the current company, would
consist of the current US Beverages, Cheese, Convenient Meals and
Grocery segments and the non-snack categories in Canada and Food
Service.
The North American grocery business, which includes popular
brands like Oscar Mayer meat and Kraft cheese, will be an
independent public company and would be called Kraft Foods Group,
Inc. It will trade under the ticker name KRFT. Following the
spin-off, the current Kraft Foods, Inc. will be called Mondelez
International, Inc. and will market popular brands like Cadbury,
Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident. It will trade
under the ticker name MDLZ. The grocery business is expected to be
spun off on October 1. Kraft Foods also named the board of
directors of both the companies.
Our Recommendation
We currently have a Neutral recommendation on Kraft Foods. The
stock carries a Zacks #4 Rank (a short-term ‘Sell’ rating).
Overall we are encouraged by Kraft Foods’ diverse brand
portfolio, significant exposure to the fast growing emerging
markets and continued strong momentum from the core brands (Power
Brands). Further, unlike most of its peers, Kraft Foods has been
delivering much better sales and profit performances in Europe
despite the region’s economic challenges. Moreover, splitting the
North American business is expected to allow Kraft to focus on its
distinct strategic priorities and allocate resources optimally.
However, we remain concerned about rising input costs and a slow
economic recovery.
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