Packaged-foods producer Kraft (NYSE: KFT ) had a busy 2009. Management set out to expand profit margins and market share, all while continuing to strengthen brand equity, drive volume gains, and grow organic revenue. And let's not forget the small matter of buying U.K.-based confectioner Cadbury (NYSE: CBY ) .
Did Kraft deliver? Mostly. But if you're looking for a smooth ride going forward, the maker of Oreo cookies and Maxwell House coffees might not be your cup of tea.
Kraft's full-year revenue came in at $40.4 billion, down 3.7% from 2008. Foreign exchange was the prime culprit, but business divestitures also played a role in the decline. Excluding such items, sales rose 1.5 % -- well below the company's long-term target of 4% organic sales growth.
As for the bottom line, earnings per share of $2.03 represent a 7% annual growth.
On a reported basis, fourth-quarter EPS quadrupled, soaring to $0.48 from $0.12 in the prior-year period. No, the business of selling mac-n'-cheese didn't suddenly turn wildly profitable. Instead, lower restructuring costs and asset impairment charges in 2009 -- which together contributed $0.37 per share -- provided most of the gain.
In fact, fourth-quarter organic revenue growth of less than 1% fell short of the company's previous forecast. Management offered two explanations. First, North American and European consumers provided weaker-than-expected demand. Big surprise, no? Second, compared to key competitors, the company held back on product discounting, deciding instead to ramp up ad spending in support of long-term brand equity. Consequently, Kraft's coffee business in particular, which consists of its own Maxwell House brand and a licensing agreement with Starbucks (NYSE: SBUX ) , lacked a caffeinated kick.
In order to confirm management's critical view of competitors' tactics, I'll be eagerly awaiting J.M. Smucker's (NYSE: SJM ) results, where performance of its Folgers coffee brand should serve as a tell-all.
Doubts aside, Kraft did post a number of definitively positive metrics. Volume/product mix improved throughout 2009, which accompanied a modest uptick in U.S. retail market share. Meanwhile, efforts to improve product quality are bearing fruit with consumers.
On the flipside, I remain skeptical about Kraft's ability to maintain its recently improved margins once commodity costs gather steam. In my view, the brand and category strength just isn't there -- at least, not yet.
Moreover, the next several quarters will likely be bumpy. Kraft anticipates $1.3 billion in cash costs associated with the Cadbury integration. Also, management's decision to jettison the pizza business is expected to shave $0.05 off annual EPS.
Finally, while shareholders of consumer-staples names such as Coca-Cola (NYSE: KO ) , PepsiCo (NYSE: PEP ) , and Philip Morris International (NYSE: PM ) are all poised to benefit from share buybacks, Kraft will focus instead on reducing its acquisition-related debt burden.
I previously highlighted Kraft's soon-to-be-realized Cadbury boost, and I stand behind those views. But investors should realize that Kraft is essentially trying to accomplish two major tasks at once -- fully revitalizing its own business, while also integrating an established global name.
Does "Good luck with that" sum it up?