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Kraft Foods Group, Inc. (KRFT - Analyst Report) reported disappointing third-quarter 2013 results as both its earnings and revenues fell shy of the Zacks Consensus Estimate. Sales were significantly weak. While the company maintained its full year 2013 organic revenue guidance, it raised its reported earnings guidance.

Kraft’s third-quarter 2013 adjusted earnings per share of 65 cents fell short of the Zacks Consensus Estimate of 68 cents by 4.4%. Adjusted earnings were also lower year over year due to a weak top line, higher interest expense as well as tax rate. In the year-ago period, Kraft Foods reported adjusted earnings per share (excluding asset impairment and exit costs) of 85 cents.

Adjusted earnings in the third quarter of 2013 exclude the market-based impacts of post-employment benefit plans. Including this item, reported earnings of 83 cents improved 5.1% from prior-year quarter’s earnings of 79 cents.

Kraft split from Mondelez International, Inc. (MDLZ - Analyst Report) last year and became an independent company. While Kraft took hold of the North American grocery business, Mondelez looks after the global snacks portfolio.

Revenue Discussion

Kraft’s third-quarter net revenue declined 4.2% year over year to $4.4 billion and also missed the Zacks Consensus Estimate of $4.560 billion due to lower volume and pricing.

Organic revenues (excluding the impact of currency and sales to Mondelez) also declined 4.1% due to lower volume/mix and pricing.

Volume/mix hurt revenues by 3.1 percentage points (pp), significantly worse than last quarter’s negative impact of 0.9 pp. The new company was also not much successful in raising prices, with pricing declining 1.0 pp, steeper than second quarter’s decline of 0.3 pp. Product pruning created headwinds of 1.0 pp. Several of the company’s product categories witnessed softness in the quarter due to lower consumption and increased competitive activity.

Adjusted operating income (excluding the impact of $175 million benefit from market-based impacts to post-employment benefit plans and $50 million of restructuring costs) declined 7.9% to $745 million due to lower revenues and higher marketing investments.

Segment Details

Effective from Jul 1, 2013, Kraft’s reportable segments became Beverages, Cheese, Refrigerated Meals, Meals & Desserts, Enhancers & Snack Nuts, and Canada. The remaining businesses including Foodservice and other international businesses were clubbed under “Other Businesses”.

Apart from the Cheese business, most of its product segments posted sluggish results in the quarter.

Beverage business revenues declined 8.0% (both reported and organic) to $625 million in the quarter largely due to lower coffee prices. Volume/mix grew 0.7pp, lower than last quarter’s 1.4 pp gain. Pricing declined 8.7 pp due to lower green coffee costs and increased promotional activity. Product mix, however, improved in the quarter due to growth in on-demand coffee and liquid water enhancers.

Cheese business revenues improved 0.9% (flat organically) to $922 million in the quarter driven by higher pricing, and sustained growth in Kraft natural cheeses and Velveeta slices. Volume/mix declined 2.3 pp due to tougher comparisons with spin-off related shipments in the comparable period of last year. Price improved 2.3 pp in the quarter.

Refrigerated Meals business revenues declined 0.7% (both reported and organic) to $878 million in the quarter due to tougher comparisons, which offset the gains from Lunchables innovation, Oscar Mayer bacon and hot dog growth and higher pricing. Volume/mix declined 2.1 pp while price added 1.4 pp to top line.

Meals & Desserts business revenues declined 6.2% (both reported and organic) to $549 million as volume/mix declined 7.1 pp while pricing went up 0.9 pp. Brands like Velveeta dinners gained from marketing investments and successful innovation. However, brands like JELL-O ready-to-eat desserts remained weak.

Enhancers & Snack Nuts business revenues declined 9.9% (down 10.3% organically) to $483 million due to both volume/mix decline of 5.0 pp and reduced pricing of 5.3 pp. Volume was weak in salad dressing and mayonnaise while lower nut costs led to lower pricing.    

Canada business revenues declined 4.6% (down 1.2% organically) to $474 million due to flat volume/mix and lower pricing of 1.2 pp. While volume suffered due to tough comparison, lower Kraft peanut butter led to lower pricing.

Other Business revenues decreased 6.1% (down 6.6% organically) to $463 million due to volume/mix decline of 8.1 pp. However, pricing gained 1.5 pp.

Fiscal 2013 Outlook Maintained

The company maintained its previously provided organic revenue guidance for 2013. Organic revenues are expected to be in line with or slightly lower than the North American food and beverage industry’s growth rate. The top-line guidance includes a negative impact of up to 1 pp from product pruning in North America.

For 2013, reported earnings guidance was raised to $3.58 (including restructuring costs), from prior expectations of $3.40 per share to include the gain related to post-employment benefit plans.

Other Stocks to Consider

Kraft carries a Zacks Rank #3 (Hold). Overall, we are encouraged by Kraft’s aggressive cost reduction and efficiency-improvement initiatives, which provide more cash to invest in innovation, brand building and marketing initiatives.

However, though Kraft’s cost-saving efforts look encouraging, it needs to show sustained improvement in the top line.

Food companies that are currently doing well and are worth considering include Diamond Foods, Inc. (DMND - Analyst Report) and Treehouse Foods, Inc. (THS - Snapshot Report), both carrying a Zacks Rank #2 (Buy).
 

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