What's Behind Kraft's Earnings Miss?

Defensive investors often go for big-name, low-beta stocks, as they tend to be less risky than the overall market. Some more aggressive investors also incorporate them in their portfolio to diversify their holdings and mitigate risks. However, Kraft's (NASDAQ: KRFT  ) most recent earnings report shows that even very large consumer staples companies aren't free from downside risk. The report missed on both the top and bottom lines, highlighting revenue-growth weakness that we have also seen from Kellogg  (NYSE: K  ) . Mondelez International  (NASDAQ: MDLZ  ) , a 2012 spinoff from Kraft, doesn't seem to be having the same problems sustaining growth.

Source: Wikimedia Commons.

Spinning off growth
Since a number of retiree benefit and accounting gains have seriously affected the results for the quarter, which were good for some $1.11 per share, I would like to focus on the numbers that strip out this effect. Adjusted EPS increased by $0.02 to $0.43, which is encouraging, but missed the $0.61 consensus by a mile. Revenue also missed, rising 2.3% to $4.6 billion versus a $4.65 consensus. Excluding currency effects, revenue was up a healthy 3.2%.

Source: Kraft.

In 2012, Kraft Foods spun off its higher-growth brands into Mondelez International in order to allow the companies to focus on their respective product lines. Mondelez ended up with global snack brands such as Oreos and Chips Ahoy!, while Kraft stayed with more established U.S. brands such as Maxwell House and Miracle Whip. Clearly, growth is harder to sustain in these highly saturated markets, although Kraft doesn't seem to be doing too badly. For the quarter, cheese was a bit of an issue over at Kraft, as a string-cheese recall hurt sales.

The problem that Kraft now faces is sustaining growth in its highly saturated developed markets, which requires a rather different strategy from focusing on growth abroad. Mondelez missed for its most recent report, but showed some solid earnings growth. On a constant currency basis, earnings increased 15.8%, while adjusted earnings were up 10.5%. Still suffering from the slowdown that has affected many consumer staples companies in emerging markets, the company expects things to pick up over the rest of the year.

Tough conditions at home
Kraft is not the only company suffering from sales issues in the developed world. Kellogg seems to be struggling as well. The cereal giant recently released some rather underwhelming numbers, in keeping with an industrywide slowdown. The full-year 2014 outlook especially was unimpressive, with the company expecting revenue growth of around 1% with EPS growth of between 1% and 3%.

According to management, sluggish growth was mainly due to a slowdown in cereal sales in developed markets, although cost-cutting initiatives have been propping up the bottom line. Pringles, on the other hand, did rather well, posting double-digit growth in the fourth quarter. For the year, the company managed to improve gross margin by some 60 basis points, while reported net sales slumped 1.7%. By region, Europe put up a solid performance with an internal operating profit increase of 15.3%, while North and Latin America were down 2.9% and 4.7%, respectively.

The bottom line
Kraft's most recent earnings report was something of a mixed bag. On one hand, the company posted some decent earnings and revenue growth. On the other hand, these figures missed the analyst consensus, and the outlook was rather soft. As part of an industrywide trend, consumer staples companies seem to be struggling with sustaining growth at home and abroad. The slowdown in emerging markets has been widely publicized, yet growth in these areas is still higher than in more established economies.

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