KRFT Updates 4Q12 & FY13 Guidance

Kraft Foods Group Inc. (KRFT - Analyst Report), the packaged food and beverage company, announced preliminary results for the fourth quarter 2012 and updated guidance for full year 2013.

Kraft Foods Group was spun off from Kraft Foods, Inc. in September last year, and the latter was renamed to Mondelez International, Inc. (MDLZ - Snapshot Report). Mondelez focuses on its global snacks business of the old Kraft Foods while Kraft Foods Group consists of the North American grocery business of the latter.

Changes in its post-employment benefit strategy was cited the reason for the financial update.

Preliminary Fourth Quarter 2012 Results

Krafts Foods expects reported earnings to be about 15 cents per share in the fourth quarter, including post employment benefits, restructuring charges and unrealized from hedging activities. Adjusted earnings, excluding including the impact of post-employment benefit changes stood at 39 cents in the quarter.

The Zacks Consensus Estimate for the fourth quarter is 30 cents. Excluding, all the charges mentioned above, earnings would have been 57 cents.

Kraft also lowered its revenue expectations for the quarter. Kraft had previously expected revenues to be flat or down in the fourth quarter The company now expects net revenues to decline 10.7% year over year due to strong comparisons in the prior-year quarter. The prior year quarter included an additional week of sales and 0.7 percentage points of currency tailwinds and sales to Mondelez.

The company expects organic revenues to decline 7.2% compared to 7.8% organic revenue growth in the prior-year quarter. Organic revenues are expected to dip due to decline in trade inventories and product pruning.

Operating income in the fourth quarter of 2012 is expected to be around $260 million. Operating income includes headwinds from post employment benefits, restructuring charges and unrealized losses from hedging. Excluding these factors, the company believes that lower sales volumes will be offset by strong productivity gains and cost savings to result in decent operating income growth.

Fiscal 2013 Outlook Updated

The company updated its 2013 outlook that was provided at the investor day meet held in September.

The company maintained its organic revenue guidance. Organic revenues are expected to be in line with long-term growth rates; i.e., equal to or above the North American food and beverage industry’s growth rate. The top-line guidance includes a negative impact of up to 1 percentage point from product pruning in North America.

For 2013, reported earnings are now expected to be about $2.75, up from the prior guidance of $2.60 (including restructuring costs), driven by productivity improvements and overhead savings. The upgraded earnings guidance includes the impact of post employment benefits and restructuring charges. The Zacks Consensus estimate stands at $2.67 for fiscal 2013.

Kraft Foods Group carries a Zacks Rank #2 (Buy). We are encouraged by Kraft’ strong and diverse brand portfolio and market share positions. Kraft is trying to improve long-term results by focusing on cost savings, brand support via strong advertising, and cash generation.

However, the company is introducing a lot of changes post spin off to bring in liquidity stability. It will take some time before gaining full momentum in the market.

Here are some other food companies that warrant investor attention. These include Flowers Foods, Inc. (FLO - Snapshot Report) and J&J Snack Foods Corp. (JJSF - Snapshot Report) both carrying a Zacks Rank #1 (Strong Buy).