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Analyst Blog

On Jun 27, we issued an updated research report on Kraft Foods Group, Inc. (KRFT - Analyst Report).

On May 1, Kraft reported dismal first-quarter 2014 results, missing the Zacks Consensus Estimate for revenues and only managing to meet the same for earnings. Lower effective tax rate, strong productivity savings and pricing gains were offset by weak volumes and higher advertising/marketing costs in the quarter.

Though earnings increased from the year-ago quarter, net revenue and organic revenues declined 3.3% and 2.4%, respectively, as lower volume/mix offset better pricing. Shift in Easter timing, retailer inventory normalization and the recent cut in federal food assistance hurt volumes during the quarter.

In fact, Kraft’s top line has been soft ever since the split from Mondelez International, Inc. (MDLZ - Analyst Report) in Oct 2012 due to broader macro pressures. Several of its product categories have been sluggish due to consumption weakness and stiff competition.

In addition, rising food costs is a growing concern for the food companies. In 2014/2015, the overall cost environment for food commodities is expected to be under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. In fact, the costs of cheese, meat and grains have risen sharply in the recent past. Costs of cheese, meat and coffee are expected to rise further in the coming quarters, thereby crippling margins.

Kraft has already raised or announced price increase for around 45% of its products to cover the rising costs. Further, in June, the company announced list price increases for its Maxwell House and Yuban roast and ground coffee brands in response to higher green coffee costs.

However, Kraft’s strong brand portfolio, aggressive cost reduction and efficiency-improvement initiatives strengthen our faith in the stock. Management expects sales to pick up in the next quarter, gaining from the Easter shift. Moreover, Kraft will activate new ad campaigns across13 franchises in the second quarter. This, coupled with innovation in Oscar Mayer, Planters, and Philadelphia brands, should lend top-line support. Kraft’s increased advertising investments, new product activity and improved quality of marketing could yield better results in future quarters.

However, the challenged U.S. food consumer environment and possible volume/market share erosion due to price increases may put pressure on the top line.

Kraft carries a Zacks Rank #3 (Hold). Better-ranked food stocks include Hain Celestial Group Inc. (HAIN - Analyst Report) and Inventure Foods, Inc. (SNAK - Snapshot Report). Both the stocks have a Zacks Rank #2 (Buy).

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