Kraft Foods Inc., in its first earnings report since its initial public offering last month, came out of the gate running, posting better-than-expected earnings and sales volume for the second quarter.
The Northfield-based maker of well-known brands ranging from Oscar Mayer to Velveeta cheese said Wednesday that worldwide volume increased 3.4 percent as growth in emerging international markets and new products offset the unfavorable effects of the strong dollar and lower raw coffee prices.
Kraft said that pro forma profits rose to $581 million, or 33 cents a share, from $512 million, or 30 cents a share, in the year-ago period. Those results assume Kraft had owned Nabisco, which it purchased in December, for all of last year, and that last month’s initial public offering had occurred Jan. 1, 2000.
Those results exceeded the consensus analysts’ estimate, as tracked by Thomson Financial/First Call, by a penny. Pro forma sales fell slightly, to $8.69 billion from $8.73 billion. Sales in the most recent quarter would have been about $182 million higher if not for the stronger dollar, which reduces foreign sales when they are translated into dollars.
Net income fell 11.1 percent, to $505 million, or 33 cents a share, from $568 million, or 39 cents a share, a year earlier, when fewer shares were outstanding. Revenue increased 24.6 percent, to $8.69 billion from $6.97 billion.
“We are pleased with our results,” said Chief Financial Officer Jim Dollive. “They put us just where we intended to be.”
Shares of Kraft rose 4 cents, to $31.49, on the New York Stock Exchange, slightly above its IPO price of $31. Philip Morris Cos. sold roughly 16 percent of Kraft in mid-June, raising $8.7 billion to pay down debts incurred from its acquisition of Nabisco.
Volumes rise
Kraft’s volumes in North America increased 2.8 percent, aided by strong introductions of such new products as chocolate-creme Oreo cookies, Mexican varieties of Tombstone pizza and Capri Sun juice in a pouch. Kraft is the largest food company in North America, where it derives nearly three-fourths of its total revenue. Internationally, volumes were up 4.9 percent.
“The volumes were very solid for a food company, so that was good news,” said Erika Long, an analyst at J.P. Morgan in New York. “It was better than what our model had forecast.”
But Betsy Holden, co-chief executive, said that she was not happy with the company’s performance in cereals, refrigerated desserts and coffee. Lower prices because of declines in coffee commodity costs hurt sales of the beverage.
Kraft officials made a point of emphasizing volume growth after sales data released last week by market-research firm Information Resources Inc. pointed to weak consumption trends for the company. The report led some on Wall Street to question whether Kraft would meet its annual volume growth targets of 3 percent to 4 percent.
Holden explained that because IRI does not measure sales of refrigerated and frozen foods in supercenters, which are combinations of discount and full-line grocery stores, the firm “understates Kraft’s growth rate by 2.5 to 3” percentage points.
Holden, however, acknowledged that IRI’s data is “generally” accurate for the retail outlets it tracks, including supermarkets, drugstores and mass merchants.
For the first six months, Kraft said net income fell 20 percent, to $831 million, or 56 cents a share, from $1.04 billion, or 71 cents a share, a year ago. Sales increased 27 percent, to $17.1 billion from $13.4 billion.
Pro forma earnings rose 11.6 percent to $1.01 billion, or 58 cents a share, from $909 million, or 52 cents a share, a year earlier. Revenue was flat at $17.1 billion.
In other local earnings news:
– Sears, Roebuck and Co. reported lackluster second-quarter results as one-time items wiped out profits, retail sales slowed and credit card delinquencies increased.
The news came as no surprise because Sears preannounced its quarterly results a week ago. But looking ahead, Sears Chief Executive Alan Lacy said the nation’s third-largest retail chain expects full-year earnings per share, excluding one-time items, to be about even with last year. It could have been worse, he added, if Sears wasn’t tightly controlling its business, keeping an eagle eye on both expenses and inventory levels.
“We continue to accelerate the pace of change,” Lacy told Wall Street analysts in a conference call.
One-time hits
As expected, earnings were dragged down by one-time, after-tax charges of $513 million, or $1.56 per share, related to its exit from the cosmetics business, HomeLife Corp.’s bankruptcy and new accounting standards for handling credit card debt sold to third parties.
Hoffman Estates-based Sears reported a second-quarter net loss of $197 million, or 60 cents per diluted share, compared with net income of $388 million, or $1.11 per share, a year earlier. Excluding one-time items, earnings met analyst expectations, falling 13 percent, to $316 million, or 96 cents per share, from $365 million, or $1.05 per share.
Revenue rose 1.8 percent, to $10.23 billion from $10.04 billion.
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In Sears’ core retail segment, revenue dipped 1.1 percent. Sears’ off-the-mall chains such as the Great Indoors and Sears Hardware increased their sales, but it wasn’t enough to offset the decline at its core chain of 860 department stores.
A difficult environment
Lacy blamed “the difficult economic environment and cooler-than-anticipated weather” for the disappointing performance. Although sales of appliances and lawn and garden equipment increased, those were more than offset by declines in apparel, home electronics and seasonal sporting goods.
The trends also weren’t good on the credit card side of Sears’ business, which often generates more than half the company’s profit. Sears increased its provision for uncollectable accounts by 9 percent, or $29 million, in the quarter, because of higher levels of customer bankruptcy filings. More recently, bankruptcy filings have moderated, Sears said.
For the first half, Sears reported a net loss of $21 million, or 6 cents per share, compared with net income of $623 million, or $1.76 per share, a year earlier.
Revenue inched up to $19.08 billion from $18.97 billion.
Sears shares, which have surged in recent weeks, slipped 15 cents, to $46.45, on the NYSE.
– In contrast to many of the nation’s largest banks, the country’s largest independent consumer finance company, Household International Inc., posted strong second-quarter profit growth, with net income climbing 14 percent, to $439.0 million, or 93 cents per diluted share, from $383.9 million, or 80 cents per share, a year earlier.
Also in contrast to traditional lenders, Household’s loan portfolio remains in good shape. Its annualized managed net charge-off rate was 3.71 percent in the second quarter, a slight increase from 3.56 percent in the first quarter.
“It’s a straight-out terrific quarter,” said Joel Gomberg, bank equity analyst at William Blair & Co. in Chicago. The company met analysts’ consensus estimates for the quarter, and shares rose 53 cents, to $69.48, on the NYSE.
Household Chief Executive William Aldinger said he expects the company to earn 15 percent more in 2001 than it did in 2000.
Focus on consumers
The finance giant has fared better than banks largely because it lends to consumers rather than businesses. Commercial loans have caused much of the recent upheaval in bank earnings.
Prospect Heights-based Household began changing its loan mix more than a year ago to include more secured loans–those backed by real estate, for example–in an effort to avoid fallout from consumer financial problems.
“Very simply, half their portfolio is secured, so the bankruptcy phenomenon has less impact on them than on others,” said Moshe Orenbuch, finance industry analyst at Credit Suisse First Boston.
For the first half, Household said net income climbed 15 percent, to $870.8 million, or $1.84 per share, from $756.8 million, or $1.58 per share, in the year-earlier period.
– Insurance brokerage Arthur J. Gallagher & Co., benefiting from higher commissions and fees amid strengthening insurance industry premium rates, said second-quarter net income climbed 35 percent.
The Itasca-based company reported net income of $23.06 million, or 26 cents a share, up from $17.08 million, or 19 cents a share, a year ago. Revenue rose 15.5 percent, to $209.1 million from $181 million.
Gallagher’s earnings were up in part because the company has been able to substantially reduce its tax obligations through certain energy-related investments: Last year, Gallagher paid income tax of $9 million, but this year, despite higher profit, it paid only $5.5 million. As a result of the lower tax rate, although Gallagher’s net was up 35 percent, earnings before income taxes rose a much more modest 9.5 percent.
The results matched Wall Street’s expectations.