Packaged-foods producer Kraft
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
In order to confirm management's critical view of competitors' tactics, I'll be eagerly awaiting J.M. Smucker's
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
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?
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