Kraft Foods Group Inc (NASDAQ:KRFT) delivered a mixed earnings report Friday — as well as news of a management shakeup — and the market’s initial reaction was to give KRFT stock a thumbs down.
Apparently the market doesn’t quite believe that KRFT will be able to deliver on its promise of faster growth. Given the macroeconomic backdrop, that skepticism is really just good thinking.
Kraft Foods has been struggling with the same problem afflicting the entire packaged-food industry for years now. Consumer demand remains soft even though the economy and labor market are much improved.
During the recession, plenty of shoppers made the money-saving move of giving up big-name brands in favor of cheaper store brands and generics. That’s not a surprise. Consumer products have seen consumers make that tradeoff before.
The difference is that, this time around, lots of customers who gave up using pricier premium brands never came back. Add in the effects of high commodity costs, and the packaged food industry finds itself in a bind. And KRFT is no exception.
In an effort to get KRFT rolling again, the company brought in a new CEO — John Cahill — in December and he, in turn, took the Kraft earnings release as an opportunity make the management team his own. KRFT said its chief financial officer, chief marketing officer, and head of R&D are leaving Kraft.
Fresh blood in the executive suite might help Kraft improve what CEO Cahill called “mixed execution” in the quarter, but it’s not clear what can be done about many of the bigger issues.
KRFT Results Beat the Street
First, the good news. KRFT was able to raise prices last quarter. (It needed to because of record-high commodity costs.) The result was that Kraft delivered solid revenue growth. The top line rose 2.2% to $4.69 billion, which topped Wall Street estimates.
Organic revenue growth was even stronger. After stripping out the effects of things like acquisitions, divestitures and foreign exchange, revenue rose 3.4%.
On the bottom line, Kraft earnings actually swung to a loss. KRFT reported a net loss of $398 million, or 68 cents per share, compared with a profit of $931 million, or $1.54 per share a year earlier.
The loss, however, was driven by a one-time charge of $1.36 billion related to post-employment benefit plans. After excluding special items, Kraft earnings came to 75 cents per share, which exceeded analysts’ average estimate by 2 cents, according to a survey by FactSet.
Ordinarily, a top- and bottom-line beat would be applauded by the market, yet Kraft stock slumped at the opening bell. Perhaps the management shakeup and downbeat assessment from the CEO on Kraft’s performance offset any silver linings.
Kraft stock has held up well recently after getting a big boost in December on news of a new CEO taking the helm. Even after today’s pullback, Kraft stock is up 2% for the year so far, a slightly better showing than the broader market.
Market action in light of Kraft earnings suggests the honeymoon is over for the new chief executive. Perhaps it dawned on the market that there’s no quick fix for craft regardless of who’s in charge.
Whatever the reason, macro challenges and market sentiment make it hard to see Kraft stock remaining a market beater for very long.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
