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second-quarter earnings tumbled 26% from a year ago because of higher commodity prices and advertising costs, as well as the food-maker's ongoing restructuring campaign.

Northfield, Ill.-based Kraft, which is 83% owned by


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, earned $698 million, or 41 cents a share, in the three months to June 30, down from earnings of $949 million, or 55 cents a share, a year ago. The most recent quarter included a restructuring charge that cut per-share earnings by 5 cents. Sales rose 4.6% from a year ago to $8.21 billion.

Analysts surveyed by Thomson First Call had been forecasting precharge earnings of 46 cents a share on sales of $8.12 billion in the 2004 quarter. Looking ahead, Kraft forecast full-year earnings of $1.85 to $1.92 a share, excluding a restructuring charge. Analysts were forecasting $1.90 a share.

In premarket trading, Kraft was recently down 55 cents, or 1.8%, to $29.75, leaving it about 15.5 times the high end of its 2004 operating earnings forecast, or about 18 times the estimate including the charge.

Kraft's expenses rose faster than sales in the most recent quarter, with cost of sales jumping 10.2% to $5.17 billion in the quarter and marketing, administration and research costs rising 9.5% to $1.62 billion. The company cited a higher expense for raw materials including cheese, the average price for which rose 70% from a year ago.

"In response to the higher costs, the company increased prices on its different varieties of U.S. cheeses by 5%-15%," Kraft said. "However, the pricing actions were not designed to fully offset the higher costs because of the company's expectation that cheese costs would not remain at historical highs. On the quarter, the price increases offset approximately one-half of the higher costs."

The company said in-market ad spending rose $170 million in the latest quarter, with roughly 80% of the increase in North America. North American marketing spending rose at least 10% in Kraft's cheese, coffee, lunch combinations, meat, salad dressing, snack nuts, foodservice and Canadian retail divisions.