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KRAFT FOODS INC (KFT)

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Kraft Foods Inc : Kraft 1Q Profit Up 1.8% As Revenue Rises But Margins Weaken

05/03/2012 | 07:48pm US/Eastern
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--Kraft's first-quarter sales and earnings beat expectations

--Margins fall as price increase unable to offset higher costs

--Europe sales strong, but North America volume falls

--Kraft seeking $2.9 billion in damages from Starbucks over severed distribution deal

(Rewrites and adds details from earnings call and interview with CEO throughout.)

 
   By Paul Ziobro 
   Of  
 

Kraft Food Inc.'s (KFT) first-quarter earnings rose 1.8%, with sales up in each region, including a strong showing in Europe despite challenging conditions on the continent.

Kraft's organic sales, which exclude acquisitions, divestitures and foreign-exchange impacts, rose 6.5% in the quarter, with higher prices contributing 5.5 percentage points of the increase and higher sales volume providing the balance. The quarter's results were boosted by an earlier Easter season that shifted candy and chocolate sales into the period.

Kraft's first-quarter earnings and revenue both topped analysts' expectations, and the company also backed its outlook for the year. In late trading Thursday, Kraft shares, which hit a multiyear high earlier this week, fell 0.5% to $39.39.

While Europe, with organic sales up 7.2%, and developing markets, up 11.5%, shined, North America rose 3% and posted the only decline in sales volume among the three regions, amid higher prices. Volume fell 2.8% in North America, reflecting challenges to Kraft when it is typically the first to raise prices in the categories in which it competes--as shoppers can shift to competitors, lower-cost private labels, or not buy the products at all.

But Kraft said some retailers were timing their purchases to try to get products at lower prices. Retailers loaded up on Capri Sun juice pouches late last year ahead of a 12.5% price increase in January. Retailers also held off on buying Maxwell House coffee in the first quarter, hoping that wholesale prices come down due to lower green coffee costs.

The higher prices are creating what Chief Executive Irene Rosenfeld called some "dislocation" in Kraft's market share in some categories. Kraft is currently losing share in a majority of its categories in North America and in developing markets, though it held or gained share in nearly two-thirds of categories in Europe.

Rosenfeld says she's happy that Kraft's sales volume held up as well as it did in the quarter, especially in North America, but still wants to claw it back. However, rather than discounting, like many food companies did in 2010, Kraft will continue to invest in marketing and rolling out new products--spending that's being made possible, in part, by ongoing cost savings.

"We are committed to getting that share back," Rosenfeld said on the company's earnings call. "We believe the combination of continued investment in our brand equity and strong innovation pipeline that we've laid out is what will be necessary to get that back and not deep discounting."

In a later interview, Rosenfeld said the strength in Europe--where other food makers like Kellogg Co. (K) have struggled lately--reflects Kraft's moves to invest behind its brands, especially what it calls "Power Brands" that deliver outsized growth. "That has really served us well," she said.

The company is moving toward a split-up by year's end, when it will create a global snacks company to be named Mondelez International and a business focused on North American grocery products that will retain the Kraft Foods name.

Kraft could also be looking at a big windfall this year, after it faces off with Starbucks Corp. (SBUX) in arbitration court in July over Starbucks's decision to terminate a distribution deal with Kraft last March. Starbucks revealed on Wednesday in a public filing that Kraft is seeking $2.9 billion in damages, well above what analysts expected Kraft to receive.

Rosenfeld said that figure was supposed to be kept confidential, making its release the latest dustup in the drawn-out breakup.

For the quarter, Kraft reported a profit of $813 million, or 46 cents a share, up from $799 million, or 45 cents a share, in the same period a year earlier. Excluding spinoff costs, integration costs and other items, operating earnings rose to 57 cents a share from 52 cents.

Revenue jumped 4.1% to $13.09 billion.

Analysts polled by Thomson Reuters had most recently predicted earnings of 56 cents a share and revenue of $13.05 billion.

Gross margin narrowed to 35.6% from 36.9% as input costs rose 6.2%.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com; Twitter: @pziobro

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