Kraft 1Q Beats the Street, Lowers Outlook

Kraft Foods Inc (NYSE:KFT) reported a better-than-expected first-quarter profit on Thursday, helped by price increases, and said it likely will raise some prices even more this year.

The maker of Cadbury chocolate bars, Oreo cookies and Velveeta cheese also lowered its full-year forecast to reflect the loss of its contract to distribute Starbucks (NASDAQ:SBUX) coffee in U.S. supermarkets.

Excluding the Starbucks loss and costs related selling Gevalia coffee in its place, Kraft said its outlook for the rest of the year was unchanged.

The first-quarter results included a benefit from commodity hedges, which somewhat insulated Kraft from recent price volatility. The benefit should reverse in coming quarters, Kraft said, as the hedges roll off -- a situation that could pressure margins.

"Costs continue to go up, and so those pressures aren't abating," said Morningstar analyst Erin Lash. "(Kraft) operated through the first quarter relatively well, but there's still several impending headwinds that could offset this trajectory."

Kraft said consumer demand for its foods held up "reasonably" well despite raising prices to offset higher costs for everything from meat to dairy to wheat. Yet more consumers may soon turn away, since all the increases will not show up on store shelves until mid-year and further price increases are on the way.

Rival food maker Sara Lee Corp (NYSE:SLE) cut its full-year forecast earlier on Thursday after price increases hurt sales volume.

"We are optimistic about the ability of our brands to withstand the increased prices given the investments we've made in them, but we are somewhat cautious given the challenging economic environment," Kraft Chief Executive Irene Rosenfeld told Reuters.

Kraft shares were up 0.1 percent at $33.76 in after-hours trading.


Kraft's net income fell to $802 million, or 45 cents per share, from $1.88 billion, or $1.16 per share, a year earlier when a gain from the sale of discontinued operations boosted its profit.Excluding items, earnings were 52 cents per share, beating the average analyst forecast of 47 cents per share, according to Thomson Reuters I/B/E/S.

Net revenue rose 11 percent to $12.6 billion. Excluding the impact of acquisitions, net revenue rose 4.6 percent. Higher prices accounted for 3.7 percentage points of growth, while volume and mix of products added the remaining 0.9 points.

In North America, revenue rose 2.2 percent. This year's later Easter holiday, which will benefit the second quarter, reduced revenue by 1.5 percentage points.

Rosenfeld also said chewing gum sales were hurt by the weak economy, and that its new Trident Vitality was disappointing.

"It's been a solid single, but Trident Layers (launched) last year was a home run," she told analysts. "It's not only been a little bit below our expectations, but it's up against a tough (comparison)."

Kraft expects organic net revenue growth of at least 4 percent this year, excluding the impact of calendar changes. It expects a profit, excluding items, of at least $2.20 a share.

In February, when it was still including Starbucks sales, it forecast earnings per share to rise 11 percent to 13 percent, off the $2.02 per share it earned in 2010.

North America's largest packaged food maker sold bags of Starbucks coffee in grocery stores since 1998, building it into a $500 million a year business. Starbucks took the business back in March, but the companies remain in arbitration over how much Starbucks may have to pay Kraft for ending the contract.

Kraft said its forecast does not include any potential proceeds from the arbitration.