Kraft Foods Inc., the largest North American food maker, on Monday posted a 26 percent drop in quarterly profit and cut its full-year forecast, hurt by higher costs for dairy products and increased marketing costs.
The company, which has also seen its U.S. business hurt by the low-carbohydrate diet craze, said it was hit by price battles in western Europe and a double-digit decline in beverage sales in Mexico.
"International (weakness) was a surprise," said David Kolpak, analyst at Victory Capital Management. "Everyone knew about the domestic business."
But the stock was up 1.65 percent Monday after trading lower last week on expectations the earnings outlook would be cut, analysts said.
"If you just look at the action of the stock in the month of July, it has been very weak heading into the announcement," Kolpak said.
Kraft, the maker of Oreo cookies and Oscar Mayer meats, earned $698 million, or 41 cents a share in the second quarter, compared with $949 million, or 55 cents, a year-earlier.
Excluding costs related to a restructuring program announced in January in response to declining market share, earnings were 46 cents a share. Analysts had expected earnings of 46 cents a share before items, on average, and 40 cents after items, according to Reuters Estimates.
The average cost of the cheese used in Kraft products rose 70 percent in the quarter over the prior-year period, though prices moderated at the end of the quarter. Kraft raised prices on various cheese products in the United States, which offset about half of the higher costs.
Kraft said it now expects full-year profit of $1.55 to $1.62 a share, including 30 cents a share in restructuring costs. That is down from its February forecast of $1.63 to $1.70 share.
The restructuring program includes cutting about 6,000 jobs over a three-year period and closing some 20 manufacturing plants.
In the second quarter, revenue rose 4.6 percent to $8.21 billion, largely due to the weakness of the dollar, which boosts the value of overseas sales when they are converted into dollars. The company is not expected to benefit as much from currency factors as the year goes on.
"Currency gets to be a harder comp as the year progresses," said Tim Ramey, analyst at D.A. Davidson & Co.
Sales volume rose 3.6 percent, largely due to acquisitions. Volume rose 4.9 percent in North America, as growth in categories with increased marketing was partially offset by significant declines in cereal and candy, which have been hit by the popularity of low-carbohydrate diets and other factors.
In February, Kraft unveiled plans for a range of health-oriented foods and other new products to help drive sales, including low-carb salad dressings and versions of its Triscuit crackers and Oreo cookies without artery-clogging trans fats.
"I think for the stock to really mount any sustained recovery, Kraft will have to start exceeding estimates for a couple quarters in a row, and it looks like we are still a ways away from that," Kolpak said.
The company maintained its outlook for full-year constant currency net revenue growth excluding divestitures of around 3 percent, and raised its volume growth to around 3.5 percent from a previous forecast of 2 percent to 3 percent.
Kraft said it expects to incur $650 million to $700 million in higher commodity costs in the year. It also expects to spend an additional $500 million to $600 million this year, compared with 2003, on marketing and to help reduce the gap in prices between its products and those of competitors.
