Kraft misses on earnings as rocky times continue

The company is struggling to deal with a broad decline in consumer spending.

By Benzinga Feb 13, 2014 8:06PM
Dad and daughter at grocery store. © Katrina Wittkamp, Lifesize, Getty ImagesBy Louis Bedigian

Shares of Kraft Foods Group (KRFT) were up slightly in after-hours trading Thursday as investors reacted to mixed fourth-quarter results from the company.

The quarter shows that the packaged foods manufacturer, like many within the industry, continues to deal with an overall decline in consumer spending.

"Things are difficult out there," said Edward Jones & Co. analyst Brian Yarbrough, who spoke to Benzinga before the market close. "I think they will meet the earnings number -- or potentially beat -- just because I think there's some operating margin expansion and some opportunities there."

Kraft may have had opportunities, but it might not have gone after them fast enough.

The company reported a fourth-quarter profit of $1.54 a share, which included a $1.11 gain tied to its retirement plans. Without those one-time retirement gains, it looks like per-share earnings came in at 43 cents. It's unclear how that figure compares with the 61 cents per share that Wall Street anticipated.

Revenue, at $4.6 billion, missed the Street estimate of $4.63 billion.

Kraft said that its operating income from meals and desserts was partially offset by an increase in ad spend. The company also enjoyed "significant" overhead cost savings and productivity gains that offset the pricing net of commodity costs and a double-digit increase in advertising.

Industry declines a mystery

The packaged-food industry has been under prolonged pressure. The problem has stumped company execs for the last year, especially when other struggling sectors (such as restaurants) are factored in.

Yarbrough said that some have blamed it on consumers' reluctance to stock their pantries as fully as they might have in the past.

"Some people say, 'It's the lower income consumer that's struggling out there, so they're buying closer to need and they're not stocking up,'" said Yarbrough.

Others are concerned that Wal-Mart's (WMT) struggling grocery department might be having a negative impact on food companies that rely on the retailer for greater sales.

Little impact from private labels

Store-owned brands -- like Wal-Mart's Great Value or Kroger's (KR) Simple Truth -- do not seem to be having a negative effect on their more expensive competitors.

"Private label gained a lot of share and there's a lot of people that moved to private label in the economic downturn," said Yarbrough. "But I think that tide has kind of shifted. I haven't seen the tide shift to where they're losing share, but I just don't think they're growing either."

This is all mostly speculation. Yarbrough said that if "these executives who run these companies don't know the reason behind [the decline], I sure don't know."

Rising warrior

Kraft may not be soaring, but shares are still up more than 14 percent over the last 12 months.

The last six months have not been overly kind to Kraft, however. The stock rose and fell more times than most investors could count.

Things have been looking up this month, however. The stock seems to be gradually moving away from its stagnation period and rose up more than 4 percent since Feb. 3.

Verdict? Kraft is a powerful, but not impervious, food producer. Investors seem to be happy with Kraft's results -- for now. But keep a close eye on how the market reacts over the next few weeks.

At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

More from Benzinga
Feb 13, 2014 11:52PM
Closed Circuit to the Execs "baffled" by the consumers not buying your "food"......MAKE ACTUAL FOOD and the consumers MAY buy your products again!! 
Feb 13, 2014 11:54PM
Folks have learned that Kraft is a major supporter of gun-control and the globalist/socialist agenda.  I haven't bought ANYTHING with the Kraft name on it for at least 10 years!
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