On Jan 9, we issued an updated research report on Kraft Foods, Inc. (KRFT).
Kraft has been struggling with its top line ever since the split from Mondelez International, Inc. (MDLZ) due to broader macro pressures. Several of the company’s product categories — salad dressings, powdered beverages and ready-to-eat desserts — have been soft for the past few quarters due to lack of innovation, lower consumption and stiff competition. Changes in consumer preferences, shopping behavior and tough consumer spending environment are hurting retail sales. Shopper trips are going down, especially the large ones, as consumers are purchasing only what they need. We apprehend that the unfavorable environment will continue to hurt organic growth in 2015 as well.
In the first nine months of 2014, Kraft recorded flat organic revenue growth which lagged the broader food and beverage industry growth of 1.7% due to weak volumes. Management expects organic sales growth to continue to lag market rates and we do not expect it to improve much in 2015 either.
Moreover, rising commodity costs turned out to be a major margin headwind for the food companies in 2014. The costs of key ingredients like cheese and meat reached record highs last year compelling Kraft to raise prices of most of its products. The price increases led to market share losses, lower volumes and gross margin weakness. Commodity cost pressures are expected to continue in 2015.
In order to improve its performance, Kraft has significantly increased its advertising investments, new product activity and the quality of its marketing, which could lead to better results, moving ahead.
Kraft’s strong brand portfolio, successful innovations, aggressive cost reduction and efficiency-improvement initiatives provide some strength to the stock.
Also, the company has appointed Chairman John Cahill as the chief executive officer replacing Tony Vernon. Analysts believe that Cahill has been brought in to “accelerate the pace of change” at the company amid a difficult operating environment for food companies. It is widely speculated that this change will lead to a reshuffle in Kraft’s brand portfolio either through divestures of some old brands or through mergers and acquisitions.
Stocks to Consider
Kraft carries a Zacks Rank #4 (Sell). Better-ranked food stocks include J&J Snack Foods Corp. (JJSF) and SUPERVALU Inc. (SVU). Both these stocks have a Zacks Rank #2 (Buy).
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