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July 28, 2008, 4:19 p.m. EDT

Kraft profit climbs 4% despite higher input costs

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By MarketWatch

NEW YORK (MarketWatch) -- Kraft Foods Inc. said Monday its quarterly profit rose about 4% as higher product prices more than offset a sharp jump in raw material costs, particularly for its dairy items.

Kraft also raised its full year profit forecast to at least $1.92 a share from its prior forecast of $1.90 a share to reflect better-than-expected growth from its operations.


Kraft shares rose 4.9% to finish at $30.83 but are still down almost 6% since the beginning of the year.

The world's second-largest food company reported second-quarter net earnings of $732 million, or 48 cents a share. A year ago, it earned $707 million, or 44 cents a share. Sales rose 21% to $11.2 billion for the three months ended June 30.

Excluding items, the Northfield, Ill.-based business said that it earned 58 cents a share. On average, Wall Street was looking for Kraft to earn 50 cents a share on sales of $10.6 billion, according to a FactSet Research analyst survey.

Higher product prices in North America, particularly for cheese items, helped to significantly offset a jump in input costs, Kraft said. Net revenue for cheese rose 10%, while convenient meals and beverages added nearly 8% and 3% each.

Kraft and other food makers have been raising prices to counter surging costs for food-ingredients and distribution. During the quarter, the company's cost of goods increased 20% to $7.1 billion. Read related commentary.

"Our investments are driving stronger top-line growth and we are now seeing that play through in improved profitability," said Chairman and Chief Executive Irene Rosenfeld. "I expect our year-over-year results to improve further in the back half of 2008 as we continue to reinvest in our brands and reduce our costs."

Kraft's U.S. cheese, snacks, and cereal businesses have faced the most profit pressure so far this year. In the quarter, operating profit at the company's U.S. cheese business rose 50.6%, while profit at its snacks and cereal unit rose 16.3%.

Overall, the food giant said its gross profit margin grew to 15.3% from 14.5%.

Besides its namesake cheese products, Kraft sells Ritz crackers, Oscar Mayer meats, Oreo cookies, and Maxwell House coffee. The company has been shedding some brands to cut costs, including its Post cereals business and Veryfine juices.

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