Kraft Foods Group Inc (NASDAQ:KRFT) is set to report earnings before Friday’s opening bell. Here’s what you need to watch for in the company’s results.
Kraft Foods Group was formed in the October 2012 breakup of Kraft Foods, when it was spun off from the parent company, which then changed its name to Mondelez International Inc (NASDAQ:MDLZ). Mondelez retained the global snack-food business, while Kraft Foods kept the North American grocery portfolio.
Kraft Foods’ organic net revenues increased 3.2% in third-quarter 2012 from the same period last year, driven by favorable pricing gains of 0.6 percentage points and gains of 2.6 percentage points from higher volume, reflecting significant gains from new products. Kraft posted strong organic growth in fourth-quarter 2011, but expects flat to down net revenue for its most recent quarter results. This is due to the company working down third-quarter 2012 customer inventory builds — largely related to the spinoff — and ongoing product pruning.
In November, the company confirmed its 2013 organic net revenue growth outlook to be in line with growth of the North American food and beverage market and EPS estimate of $2.60. I’ll be looking to see if and what type of growth took place in the fourth quarter, whether the company met its yearly target, and if it’s on track to meet its 2013 EPS estimate.
Kraft is placing renewed focus on increasing advertising spend on core brands, reformulating existing products, and launching new product categories. Concurrently, Kraft intends to operate a much leaner, cost-efficient organization. Instead of focusing solely on growth, the company plans to enhance measures like free cash flow and return on invested capital.
I consider this a crucially important move for a giant player in a mature, slow-moving market. As CFO Tim McLevish summed up in a press release last September, “Cash will be king at Kraft.” In the future, I’ll be looking to see whether profitability metrics are improving.
Big-brand and private-label competitors constantly threaten Kraft’s categories. In order to compete with North American market leader PepsiCo, Inc. (NYSE:PEP) and other branded competitors, Kraft must relentlessly invest in its core brands and launch new products.
Last month ConAgra Foods, Inc. (NYSE:CAG) completed its buyout of Ralcorp Holdings, Inc. (NYSE:RAH), raising a huge private-label threat to the commoditized categories in which Kraft competes, namely cheese and grocery. Now that the deal has gone through, ConAgra is the leading private-label food company in North America.
I’ll be watching to see Kraft’s response in its product innovation in light of the increased big-brand and private-label threats.
The article 3 Things to Watch For in Kraft’s Earnings originally appeared on Fool.com and is written by Nicole Seghetti.
Fool contributor Nicole Seghetti owns shares of PepsiCo and Mondelez International. You can follow her on Twitter @NicoleSeghetti. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo.
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