Kraft looks to advertising to revive North America sales

Posted by Nicole Eckersley on 10th August 2010

Kraft foods logoKraft Foods has said it will increase advertising in the second half of the year in a bid to restore sales growth in North America.

Speaking on the firm’s earnings call last week, chairman and CEO Irene Rosenfeld said Kraft has continued to invest in brand-building in North America and expects “solid growth” in the second-half of the year.

“We have solid plans in place to address these issues,” Rosenfeld said. “And that will result in sequential improvement in top-line results in the second half. Our advertising will in fact be higher in the back half. We have planned it that way in our base plan. We got a fairly robust innovation pipeline that was always back-half loaded…and we have a pretty good roster of new products as we look into the back half.”

Kraft has said it will release details of its strategies at the firm’s investor analyst day.

The US food giant booked diluted earnings per share of US$0.53 for the three months to the end of June. A consensus forecast from US analysts has EPS at $0.52.

Net revenues grew 25.3% to $12.3bn; Cadbury contributed 22.8% of that growth. Organic net revenue from Kraft’s “base” business was up 2%.

However, in North America, organic net revenues on a combined basis fell by 1.3%, reflecting a 1.9% decline in organic net revenue from Kraft Foods’ base business and 7.5% organic net revenue growth from Cadbury.

“Our base business results came in weaker than expected, declining by 1.9%,” said Kraft CFO Timothy McLevish. “Our performance was driven by four factors: a continued weak consumer environment; lower sales growth at a key US customer… aggressive promotional activity in a few US categories, especially biscuits, cheese and salad dressings; and about a 50 basis point impact from the Easter shift.”

Despite Kraft’s performance in North America, the firm said it is “pleased” with the ongoing strength in Europe and developing markets.

“We expect our earnings momentum to continue in the second-half. This momentum will enable us to invest in the business, while still delivering at least US$2 in operating EPS.

“We already have made a number of investments in Europe, in the US and elsewhere. We now have the earnings flexibility to go beyond that and we are making selected investments in the best opportunities that we see around the world,” Rosenfeld added.

Looking to the second half of the year, Kraft cut its group target for combined organic net revenue growth from “at least 4%” to growth of 3-4%.

Bernstein analyst Alexia Howard believes Kraft appears to have “a lot of control” over landing EPS at or above guidance in 2010 and 2011.

“We believe that management is weathering exogenous factors such as rising commodity costs and competitor and retailer pressures fairly well. However, we are tempering our EPS estimate for 2010 from $2.06 to $2.03 and our 2011 estimate from $2.36 to $2.33 based on these factors,” she said.

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