Kraft Foods (
KFT
) announced its Q2 earnings on August 2. A strong dollar negatively
affected the top-line growth of the company as the total revenues
declined 4.3% to $13.3 billion. Revenue decline was attributable to
a 5% impact of currency headwinds and 2.7% impact due to the
benefit of accounting calendar changes in the previous year. On an
organic basis, revenues grew 3.4% to $14.0 billion.
On the other hand, strong pricing helped gross margins
widen to 36.7% vs 35.1% in the previous year. Net income rose 5.9%
to $1.03 billion or 58 cents a share. Kraft Foods also
announced that the spin-off of its grocery business would be
complete by October 1. The food and beverage giant reaffirmed its
full year guidance of a 5% increase in revenues and a 9% rise in
operating income. Operating margins were also affected by the
company's on-going restructuring and one time spin-off costs.
However, excluding the impact of one-time events and currency
effects, operating income grew 8% on an organic basis.
International Markets the Key to Growth
Naturally, top-line growth for Europe and developing markets
were affected to a greater extent than its North American
counterparts because of currency fluctuations. European revenues
declined 17%; however they managed to rise 1.4% on an organic
basis. This is certainly impressive given how the major food and
beverage companies are struggling to post any sort of growth in the
region.
Similarly, revenues for developing markets declined 3.5% on a
reported basis but grew 8% on an organic basis. Again,
reported revenues were affected by currency headwinds to a large
extent. Developing markets are an important segment for Kraft foods
and now constitute almost 30% of the total revenues. Some of the
most important markets in this segment are the Middle East, China
and India.
And the food & beverage giant is shoring up its presence in
these markets significantly. Earlier in the year, the company
stated that it will double the capacity of its Saudi Arabia's
Nabisco Arabia plant which produces Oreo cookies, Ritz crackers and
belVita biscuits at a capital expense of $16 million.
Kraft is also targeting Israel's chocolate industry, estimated
to be growing annually at 8%. In China, Kraft
is molding its portfolio to introduce products/flavors
that are more likely to appeal to the local tastes. The
company will soon launch Ritz crackers in new flavors named
'fantastic beef stew' and 'very spicy chicken'. Besides launching
new products, Kraft also plans to step up marketing and widen
its distribution channels in the country. In India, Kraft is
targeting the premium chocolate market with the launch of its
much-loved Toblerone brand.
We currently have a $40 price
estimate
for Kraft Foods
but we are in the process of revising our estimates to incorporate
Q2 earnings.
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