Kraft Shows Growth Appetite But Currency Takes A Bite From Earnings


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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This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: GIS , K , KFT , KO , PEP



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