Kraft Foods 1st-quarter profit rises 10 percent, sales slip as consumers keep cutting spending

Kraft Foods 1Q profit rises 10 percent

MILWAUKEE — Kraft Foods Inc. said Tuesday its first-quarter profit rose 10 percent even as sales took a hit from the stronger dollar. The maker of Velveeta, Oreo cookies and Maxwell House coffee says it plans to focus on its core products, where it can make the most money, to emerge from the recession even stronger.

Chief Executive Irene Rosenfeld said the nation’s largest food and beverage maker is cutting unprofitable product lines as it looks to sell more of its higher-margin products, like Kool-Aid and macaroni and cheese.

Marketing will be key as it narrows its range and focuses on profits, she said, adding that the company plans to keep its brands prominent in the minds of consumers — who are continually looking to cut back on their spending.

So while Kraft is keeping its marketing spending flat this year, its presence in the marketplace will increase as it takes advantage of lower advertising rates. Since ingredient and energy costs are lower, Kraft will reinvest those savings into marketing for its priority brands — including cream cheese, Kraft singles and pizza — to keep sales up.

“That strategy appears to be serving us well,” Rosenfeld told The Associated Press.

It is helping buffer the impact of the stronger dollar, which dragged revenue down 7.9 percentage points in the quarter. Overall, revenue for the Northfield, Ill.-based company fell 6.5 percent to $9.4 billion in the quarter, from $10.05 billion in the year-ago period.

As the U.S. dollar gains strength, that weighs on international sales for U.S. companies. The company’s revenue in Europe fell 19 percent to $1.9 billion, with foreign currency pulling those results down by 25 percentage points.

Kraft said it earned $660 million, or 45 cents per share in the three-month period ending in March. That compares to a profit of $599 million, or 39 cents per share, a year earlier, when results were dampened by $98 million in restructuring costs.

The earnings beat analyst predictions for a profit of 40 cents a share, according to Thomson Reuters. But revenue fell short of analysts’ expectation for $9.67 billion.

Shares gained 96 cents, or 4 percent, to close at $25.22 in trading Tuesday.

Stifel Nicolaus & Co. analyst Christopher Growe said the better-than-forecast earnings were driven by a lack of restructuring costs and hedging gains on commodities, since prices have come down. He noted volumes were weak, but still better than predicted.

Volume and mix — the types of products people buy — fell 3.4 percent, though Kraft said that was better than expected. Volume alone was down 2 percent, and Kraft noted that retailers reduced inventory less than expected. Retailers had been cutting back on orders from many branded food makers as they worried about consumers trading down to store brands, and tried to ensure they had enough cash on hand to run their own businesses.

Even as consumers cut back on their spending, Kraft’s top brands are attracting customers and their strategy of marketing is paying off, said Christopher Shanahan, a research analyst with Frost & Sullivan.

“That’s such an advantage they have relative to their competitors,” he said. “They know how to manage their brands and that’s a really good thing.”

Rosenfeld said the trimming of unprofitable businesses contributed 1 percentage point to the revenue drop in the quarter. But she said volumes lost from cutting certain business is expected to improve by the second quarter due to the focus on higher-performing brands.

Kraft said sales of top brands like Oreo cookies and macaroni and cheese grew by double-digit percentages in the quarter. Rosenfeld said consumers consider those brands, and others like Jell-O and Kool-Aid, to be a good value, so sales are strong.

But categories like cheese and snacks, which includes other cookies and nuts, saw volume and mix drops.

The shift of Easter into April this year from March last year hurt revenue by 1.6 percentage points, Kraft said — though those sales are expected to appear in the second-quarter results.

Organic revenue grew 2.3 percent as Kraft’s prices were higher in the quarter compared to last year. Food companies saw costs for key ingredients like corn and fuel oil reach record highs last year, so they have been raising prices to offset those high costs.

The company reiterated its 2009 profit forecast of $1.88 per share.

AP Business Writer Vinnee Tong in New York contributed to this report.