Kraft Profit Up, Outlook Lowered

Kraft Foods Inc. (KFT), the largest U.S. food company, Tuesday posted a 27.3 percent increase in quarterly profits, helped by a tax benefit and lower restructuring charges, though costs of energy and ingredients weighed on profit margins.

The maker of foods ranging from Oreo cookies to Maxwell House (search) coffee also lowered its full-year earnings forecast range by 2 cents a share due to higher than expected restructuring charges as it posted an asset impairment charge related to its accord to sell its fruit snacks business. At the same time it raised its sales forecast, helped by new products.

Kraft shares fell 2 percent on Inet from the Tuesday New York Stock Exchange (search) close.

Kraft had profit of $713 million, or 42 cents a share in the quarter, compared with $560 million, or 33 cents a share a year earlier.

Earnings from continuing operations were 41 cents a share, a penny higher than Kraft's previous forecast range of 37 cents to 40 cents, because tax benefits offset higher energy and packaging costs. Some of that surplus is being used to help launch the company's Tassimo hot beverage system in the United states and Germany.

Sales rose 6.4 percent to $8.06 billion, with higher prices adding 1.6 percentage points to the increase. But volume, which factors out currency and prices changes, fell 0.3 percent excluding acquisitions, as higher prices pressured businesses like ready-to-drink beverages.

Like most food makers, Kraft has raised prices in recent months to try to mitigate rising costs if energy, packaging and ingredients like nuts, cheese and meat.

The company has also been selling off some businesses, including the Life Savers and Altoids candy brands, in order to focus on core products like coffee, cheese and cookies.

But some analysts question how long Kraft sales can keep improving at that pace, saying the increases are being bought with aggressive, costly marketing.

"Kraft's sales gains are not sustainable because they are essentially rented with higher sales promotion," Timothy Ramey, analyst at D.A. Davidson, said.

Ramey, who rates Kraft shares "underperform," noted that gross margin fell to 36.7 percent from 38.3 percent a year earlier.

Roger Deromedi, Kraft chief executive, said commodity costs were up $250 million in the quarter and that increases had yet to keep pace, weighing on margins.

"They'll improve as we go through the year," he said of margins in an interview with Reuters

Kraft forecast full-year profit of $1.73 cents to $1.78 cents a share, down from its previous forecast of $1.75 to $1.80. But it also forecast a 4.5 percent to 5.5 percent increase in sales on a constant-currency basis, excluding divestitures. that is up from its previous 4.5 percent to 5.5 percent increase.

Kraft expects its tax rate to add 6 cents a share to earnings, helped by the resolution of tax matters overseas and a new U.S. manufacturing tax deduction.

Kraft shares closed Tuesday at $31.52 on the New York Stock Exchange, but dipped to $30.90 on the Inet electronic broker system.