Kraft Foods Group (UNKNOWN:KRFT.DL) provided investors with a financial update after Thursday's closing bell. Here's what you need to know about the company's recent earnings release.
1. Mixed bag of results
Kraft's profit rose in the second quarter, but its revenue slipped on weak sales of cold cuts, salad dressings, and Jell-O. The company attributed its drop in sales to a number of factors, including lowered beverage prices as a result of increased promotions. Pointing to a one-time benefit related to its pension plans, the maker of Oscar Mayer and Miracle Whip raised its full-year earnings outlook. Yet Kraft expects its 2013 revenue to grow at the same rate or slightly lower than the overall North American food and beverage market.
The decline in sales comes as Kraft looks to find its footing as an stand-alone company after splitting from Mondelez International last October. Kraft took the North American grocery business while Mondelez retained the higher-growth global snack business, including Oreo, Nabisco, and Cadbury brands. Since the corporate split, though, Kraft's stock is up an impressive 34%, vastly outperforming Mondelez's 20% return. By comparison, the overall stock market is up roughly 16% during that same period.
2. Management focused on the right measures
Like most mature consumer products companies, Kraft's management is prioritizing profitability over revenue growth. Since the spinoff, Kraft has focused on operating a leaner, more cost-efficient organization, by concentrating on return on invested capital and free cash flow. After cutting jobs and other expenses, the company has emerged with a much leaner cost structure. But Kraft is susceptible to volatile commodity costs and budget-conscious consumers, who're increasingly switching to private-label food and beverages.
3. Its biggest challenges aren't going away
One of Kraft's largest threats is the changing landscape of the grocery market. Private-label and other big-branded competitors constantly pressure Kraft's highly commoditized categories. Since private-label goods typically cost consumers 20% to 40% less than branded ones, frugal customers increasingly fill their grocery carts with them. In order to effectively compete with private-label and other branded competitors, Kraft must relentlessly launch new products, distinguish their value proposition, invest in core brands, and fine-tune pricing strategies.
Foolish bottom line
Kraft faces a tough battle as it fights for market share and defends its brands in an increasingly commoditized food and beverage industry. Management appears focused on the right metrics, but time will tell if its efforts translate into long-term, sustainable results.