Kraft profit beats expectations

CHICAGO (Reuters) - Kraft Foods Inc KFT.N posted a higher-than-expected first-quarter profit helped by price increases, cost-cutting measures and consumers eating at home more often to save money.

Kraft brand macaroni and cheese boxes are shown in a store in Oakton, Virginia September 18, 2008. REUTERS/Larry Downing

Kraft, like some other food companies, has benefited from consumers eating at home more frequently during the recession, buying products like its DiGiorno frozen pizzas.

Also, as consumers look to save money, they are buying lower priced products like macaroni and cheese, Kool-Aid drink mix and other items that are higher margin products for Kraft, the largest North American food company said.

Kraft, which also makes Oreo cookies, Maxwell House coffee and a host of other well-known products, said profit was $662 million, or 45 cents a share, compared with $601 million, or 39 cents a share, a year earlier.

Analysts on average forecast 40 cents a share, according to Reuters Estimates.

In recent years, Kraft has cut production costs while also spending more on advertising and product development to help it garner higher prices and fend off competition from lower-priced store brands.

Kraft said margin rose 2.9 percentage points to 13.5 percent, due to price increases, cost savings, the elimination of less profitable product lines and the absence of restructuring charges in the quarter.

Price increases did cut into market share in the United States, with only 40 percent of the company’s revenue in that country coming from brands that were gaining market share, down from 48 percent in the fourth quarter.

“If you use market share, you’d have to argue that there is still work to be done,” Edward Jones analyst Matt Arnold said. “But in terms of the stock, and what we think will move the stock, margins are central here.”

Kraft’s market share performance should improve as the year goes on and the company reaches the anniversary of price increases it made last year, CEO Irene Rosenfeld said. Also, the shift of Easter to April from March hurt market share because some Easter-related categories are ones where Kraft has better market share, she said.

Sales fell 6.5 percent to $9.4 billion, hurt by the impact of the stronger dollar, which lessens the dollar-value of sales made overseas. Easter moving into April this year also cut into first-quarter sales.

Organic revenue, a measure of sales that excludes currency fluctuations, acquisitions and divestitures, rose 2.3 percent.

For the year, Kraft still expects to earn $1.88 per share, with organic revenue up about 3 percent. The company said that the currency and economic environment were still too volatile to change the forecast despite the better-than-expected quarter.

Kraft shares rose $1.49 to $25.75 on the New York Stock Exchange.

Reporting by Brad Dorfman; Editing by Derek Caney and Maureen Bavdek