Free Annual Reports
Kraft Feels The Pricing Pinch
Kraft Foods (NYSE:KFT), the second-largest food company in the world, could not avoid food cost inflation in 2010. Despite this, the company managed to meet analyst expectations in the fourth quarter. Kraft reported fourth-quarter EPS of 31 cents, a 29.5% decline from the same period last year. However, the fourth-quarter figure included Cadbury acquisition costs. Absent those expenses, fourth-quarter EPS was in line with estimates at 46 cents, compared to 48 cents a year ago. Revenues at Kraft were up 30% to 13.8 billion as a result of Cadbury, but still above estimates of $13.5 billion. (For more recent news on commodity prices and food stocks, see Corn: A Hot Play With Staying Power.)
IN PICTURES: 10 Ways To Cut Your Food Costs
Higher Prices on Kraft Products a Must
Throughout the year, Kraft had indicated that it would strategically implement price increases to deal with the rising costs in sugar, corn and other commodities essential to the company's food production. Unfortunately, the continued rise in commodity prices is forcing the company to implement additional price increases. But despite the company's best efforts to increase prices in Europe and North America, margins suffered during the quarter. Gross margin was 34.8% of sales in the fourth quarter versus 37.2% in the 2009 period, while operating margins were 9%, down 240 basis points year over year. As a result, the company has been attempting to mitigate these effects with higher prices, especially since Kraft sees no indication that commodity prices are weakening in 2011.
Commodity Prices: A Food Industry Issue
No food-related stock is being spared from rising commodity prices. Rival food companies Kellogg (NYSE:K) and Sara Lee (NYSE:SLE) have already announced results and their need to raise prices. Even non-food-related names like consumer goods giant Procter & Gamble (NYSE:PG) is experiencing gross margin pressure related to commodity price increases. Of course these price increases are coming at an inopportune time, as many consumers are still trying to maintain a tight lid on expenses. As a result, Kraft admitted that 2011 growth and profitability will likely be affected by the need to raise prices in a weak consumer environment. The company now projects operating income to grow by 11-13% versus an earlier projection in the mid teens. (Learn more about company margins in The Bottom Line On Margins.)
Wait and See
Kraft, like many other related companies, is being affected by commodity price pressures. Although the company has stated that price increases are a certainty, Kraft will increase prices strategically and gradually in light of the weak economy. But with commodity prices affecting everyone including generic branded food companies, consumers will ultimately be feeling the pinch. (For related reading, also take a look at Fight Back Against Inflation.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 10 Ways To Cut Your Food Costs
Higher Prices on Kraft Products a Must
Throughout the year, Kraft had indicated that it would strategically implement price increases to deal with the rising costs in sugar, corn and other commodities essential to the company's food production. Unfortunately, the continued rise in commodity prices is forcing the company to implement additional price increases. But despite the company's best efforts to increase prices in Europe and North America, margins suffered during the quarter. Gross margin was 34.8% of sales in the fourth quarter versus 37.2% in the 2009 period, while operating margins were 9%, down 240 basis points year over year. As a result, the company has been attempting to mitigate these effects with higher prices, especially since Kraft sees no indication that commodity prices are weakening in 2011.
No food-related stock is being spared from rising commodity prices. Rival food companies Kellogg (NYSE:K) and Sara Lee (NYSE:SLE) have already announced results and their need to raise prices. Even non-food-related names like consumer goods giant Procter & Gamble (NYSE:PG) is experiencing gross margin pressure related to commodity price increases. Of course these price increases are coming at an inopportune time, as many consumers are still trying to maintain a tight lid on expenses. As a result, Kraft admitted that 2011 growth and profitability will likely be affected by the need to raise prices in a weak consumer environment. The company now projects operating income to grow by 11-13% versus an earlier projection in the mid teens. (Learn more about company margins in The Bottom Line On Margins.)
Wait and See
Kraft, like many other related companies, is being affected by commodity price pressures. Although the company has stated that price increases are a certainty, Kraft will increase prices strategically and gradually in light of the weak economy. But with commodity prices affecting everyone including generic branded food companies, consumers will ultimately be feeling the pinch. (For related reading, also take a look at Fight Back Against Inflation.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
Free Annual Reports
