Rising commodity prices spoil Kraft’s quarter

photo 1
Milk and butter are a necessity to make one of Kraft’s most well-known products.

By Brittany Magee

Kraft Foods Group Inc., pinched by rising prices for dairy products and other commodities, reported a slight dip in its third quarter earnings on Wednesday.

For the quarter ended Sept. 27, net income at the packaged-food maker fell to $446 million, or 74 cents a diluted share, from $500 million, or 80 cents a share, in the year ago quarter. The latest quarter’s per-share results met analyst expectations.

The company’s year-ago net income results were artificially increased by one-time items: excluding those items, Kraft said, adjusted per share earnings last year were 65 cents.  On that basis, Kraft’s latest profit showed an increase from last year.

Revenue edged up by 1.4 percent, to $4.40 billion from $4.39 billion, falling just short of  analysts’ expectations of $4.47 billion.

The increase is due in large part to the company’s 7 percent increase in cost of sales brought on by volatile commodity prices, particularly in the butter and cheese sectors. Kraft depends on such dairy commodities for many of its products, such as Kraft American Cheese Singles.

Kraft’s results have been under pressure from soft consumer demand, in part because consumers are opting for healthier food options. That has made it harder for the company and other food makers to passing through the higher prices they are paying for raw materials.

“We believe that it may be hard to renovate products like Jell-O and Kraft and Velveeta dry dinners to appeal to a consumer that is turning towards the perimeter of the store for products with simple ingredients and no additives,” said Sanford C. Bernstein Co. senior analyst Alexia Howard in a note to clients. “In addition, we suspect that the rise of new cleaner label brands may be adding to the problem of category weakness.”
The Northfield, Ill.-based company, which produces other well-known brands of Oscar Mayer, Maxwell House and Kool-Aid, said increased costs pressed gross profit margins down to 29.3 percent in the third quarter, from 33.8 percent a year earlier.

“We remain on the right path, strengthening execution of our playbook and proactively addressing the macro and consumer trends that will drive sustainable profitable growth,” said Kraft Foods Group, Inc. Chief Executive Officer Tony Vernon in a conference call Wednesday.
“As a result, we’re on track to deliver full year EPS performance consistent with the expectations we laid out to you in early February.”
Revenue for meals and desserts declined 6.7 percent to $512 million.
Other sectors of the company also experienced gains. Revenue for beverages rose slightly to $628 million, reflecting the gains from higher coffee prices. Refrigerated-meals climbed 3.4 percent to $908 million.
Cheese revenue, which has experienced increased pricing the most at Kraft, rose 1.6 percent to $937 million.
Kraft’s latest results got a cool reaction from Wall Street:  In NASDAQ trading Thursday morning, the company’s shares were trading down 2.3 percent at $55.62.