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Kraft
misses its forecast, will cut some prices |
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From Article
Below: The protesters
want Kraft to remove genetically engineered ingredients from Shoppers who recoiled at Kraft Foods' price increases on cookies and crackers earlier this year will get a reprieve. Kraft announced Wednesday it will cut prices on some of its products and spend more money to advertise others to try to stem falling sales of its most important, high-margin products, notably cheese, crackers, cold cuts and coffee. The moves are designed to reverse worrisome trends underlying what Kraft executives called a disappointing second quarter, in which profit rose less than the Northfield-based company's own forecast. Kraft, known for its Oreos, Oscar Mayer meats and Nabisco crackers, is finding it tougher to fend off cheaper store brands, especially in a weak, job-scarce economy. Kraft also suffered when its Nabisco unit's "Chips Ahoy Warm 'n Chewy" cookies suffered disappointing sales. For reasons a Kraft spokeswoman could not explain, the cookies had to be pulled off the market for a short period in Canada, where there were problems with the microwave instructions. The company also was hurt because of the financial woes of some of its customers, including Fleming Cos. and Kmart. Kraft Co-CEOs Betsy Holden and Roger Deromedi were grilled by Wall Street analysts during a conference call Wednesday, who questioned whether Kraft has grown too big and unwieldy, and whether it has the right strategy and the right managers to pull off a turnaround. Though Deromedi said 2004 "will be another challenging year," partly because of higher pension and employee benefits costs, he and Holden defended the company's efforts as necessary to maintain shareholder value--a long-held Kraft philosophy. ''We had a sort of double whammy'' of disappointing new products and slowing sales, Holden said. But Kraft's strategy will come at a cost. The extra $200 million Kraft will spend this year to more aggressively promote and advertise its key products will reduce diluted earnings per share. Kraft lowered its earnings forecast for the year to a range of $2 to $2.05, reflecting growth of 2 percent to 5 percent from 2002. Kraft, which will continue the higher spending through 2004, had earlier forecast profit of as much as $2.15 a share, and Wall Street analysts had expected $2.13 a share. Kraft now expects volume growth of 2 percent this year, lower than its already-shrunken estimate of about 3 percent. Analysts searched for an answer to the changing numbers. They reminded Holden and Deromedi that Kraft had boasted of 15 percent yearly growth rates for three straight years after Kraft's parent company, Altria Group Inc., sold 280 million Kraft shares in the second-largest initial public stock offering ever. The June 13, 2001, offering raised $8.68 billion. Kraft's shares, which rose 2 cents to close at $30.80 before the earnings report was released, fell more than 7 percent in after-hours trading. Earlier this year, Kraft had raised wholesale prices on some of its cookies and crackers, including Oreo and Ritz, by about 3 percent because of higher cocoa and wheat costs. Most of the price increases amounted to about 7 cents a package wholesale. For the second quarter, Kraft reported its net income increased to $949 million, or 55 cents a share, from $901 million, or 52 cents a share, a year earlier. Analysts surveyed by Thomson Financial had expected Kraft to earn 58 cents. Sales rose 4.4 percent to $7.8 billion. Among a few bright spots were strong sales of Uh-Oh Oreos, Capri Sun Sport drink and Altoid breath-freshening strips. Volume sales rose a less-than-expected 1.7 percent. Kraft has run up against a bevy of other problems lately: * Kraft is struggling in the dry dinner-mix aisle, according to an investors' note from analyst Romitha Mally of Goldman Sachs. Kraft has reportedly discontinued its Stove Top Classic line of foods because it was performing poorly against lower-priced brands, according to a report in Advertising Age. The company also has been unable to improve sales of "It's Pasta Anytime" microwaveable meals, which it acquired from Borden two years ago, according to Mally's note to investors. * Moody's Investors Service changed its outlook on Kraft's debt Wednesday to negative from stable based on fears that Kraft may have to bail out its parent company, Altria Group Inc. Shares of Altria continued to fall on worries that the company's Philip Morris tobacco unit may have to put up a $12 billion bond before it appeals a verdict that it deceived smokers about the safety of "light" cigarettes. Philip Morris, the world's largest cigarette maker, has said the higher bond may force it into bankruptcy and might jeopardize its payments to states under a $246 billion nationwide settlement. * Opponents of genetically modified foods demonstrated against Kraft's policies on Wednesday at the World Food Congress of Science and Technology, which is meeting in Chicago. The protesters want Kraft to remove genetically engineered ingredients from the foods it sells in the United States because the U.S. Food and Drug Administration has no power to protect consumers against allergic or other reactions that may result from genetically altered food ingredients. The FDA also doesn't require that foods be labeled as containing the ingredients. * Two of Kraft's top executives left the company last week--Irene Rosenfeld, president of Kraft's North American business, and Michael Polk, head of biscuits, snacks and confections. Separately, Mally of Goldman Sachs speculated that Kraft's board will increase the dividend substantially when it meets Aug. 26. Contributing: Bloomberg News
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