KFT Slices at Margins

For Thomas' preview heading into the Kraft conference call, please click here.

Kraft's (KFT - commentary - Cramer's Take) diluted EPS from continuing operations was 45 cents vs. 40 cents. Third-quarter revenue growth was 19%, but stripping out 4% from currency and 8% of net acquisition/divestitures (mostly the LU acquisition) leaves 7% organic revenue growth. Pricing was 8.4% countered by 0.4% on poorer mix and a 0.9% volume decline, which management says was about 0.5% self-induced by cutting SKUs and products with low profitability, heavily in cheese.

Cost of goods sold rose 22%, mainly from commodities, resulting in a gross-margin dollar increase of 15%. The gross-margin percentage was 32.2% vs. 34% last year. SG&A rose 14% (18.4% of sales from 20.4% last year and 21.1% in the second quarter), allowing operating income to increase 14% (13.8% from a 13.6% margin last year). Cheese earnings were up big from a depressed quarter last year (operating margin in cheese from 11.8% to 19.5%). A big 81% increase in interest expenses net of a slightly lower tax rate caused a 4% earnings increase from continuing operations. The share count was down 5%

Management believes that it has about caught up to commodities cost increases with its price increases. The organic revenue growth outlook for 2008 was raised to 7% from 6%. Excluding non-comparable items, 2008 guidance is now at least $1.88 (Street average is $1.91), which is reflective of a lower tax rate that was worth 1 cent in this quarter, currency effects, higher interest expense (commercial paper is still out there) and higher-than-expected dilution from the Post exit. More importantly, the 2009 EPS guidance was at least $2.00 (Street presently at $2.02) on 4% organic revenue growth. Management did talk about "moving parts" and "backstopping our plans" in the release. I would not criticize any management for waffling in this environment.

Management believes that fourth-quarter retail food inventory could be coming down in the U.S., and apparently, it already has in Europe.

---

At the time of publication, Thomas had no positions in the stocks mentioned.