Recently, Kraft Foods Group (NASDAQ: KRFT) released an earnings report with mixed results for the 2014 fiscal year. In the second quarter of 2014, the company margins were negatively impacted by growing manufacturing costs and inflation of the cost of commodities.

However, the company constantly made efforts to grow its top line by increasing prices, and trying out new renovations and innovations that will take effect in the upcoming quarters. Additionally, the company is on the right path to cut costs to reduce its overhead expenses. Kraft Foods also has a solid cash flow, and has been transferring its success with its shareholders by giving back cash through dividends and by buying back shares. KRFT currently has a dividend yield of 3.5 percent, a high number that appeals to investors.

Performance and Stock Influencers

In recent years, the consumer industry has been experiencing increasing competition that pressures the top line growths of the players in the space. Kraft’s own top line growth has been dragged down by this conditions. In order to overcome these hurdles and improve its company, Kraft has been consistently rolled out innovative and renovated its diverse product selection.

For the second quarter of 2014, Kraft posted an unimpressive sales growth of 0.7 percent. Kellogg (NYSE: K), on the other hand, saw a net decrease of -0.8 percent year over year in the same quarter.

The Easter season during that quarter increased prices, and boosted the company’s net sales. In an effort to face the competition of inflated costs of raw materials such as coffee, meat, and diary, Kraft was forced to increase the prices of nearly half of its product selection. The cheese products in Kraft’s selection grew in price by 5 to 10 percent. The company raised the prices of its coffee products by 10 percent.

While the increase in prices was in response to an increase in commodity prices, there are benefits that come from the price hikes that have yet to be realized. The growth in prices of commodities dragged down Kraft’s margins – the company’s gross margins fell from 33.5 percent in the second quarter of 2013 32 percent in the same quarter this year in 2014. It’s operating margin also decreased by 0.1 percent year over year in the second quarter of 2014.

The company has also struggled in growing its top line figures. Given the current industry conditions, the company is focusing on cutting its costs and growing its margins. Kraft is doing so by improving its supply chain and manufacturing facilities in the North America region. The company’s goal is to improve gross productivity by 5 percent by the year 2016.

Kraft has also succeeded in decreasing its SG&A expenses so far. The company has done so by taking initiatives in improving its productivity. The company’s SG&A percentage of sales has dropped from 15.6 percent in the second quarter of 2013 to 13.5 percent in the same quarter of this fiscal year.

Still, the company has room to continue cutting its expenses and growing its margins. Currently, Kraft has a lower gross margin of 32 percent and operating profit margins of 18.4 percent. Compare those figures to Kellogg’s gross margin of 44 percent and operating margins of 22.3 percent. Going forward, if the company remains true to its innovation and productivity, its margins will rise.

Risks

The industry that Kraft operates in is a mature space, which means that the company should emphasize improvement in productivity in order to expand margins and grow its bottom line. The company’s bottom line could slow in growth if Kraft cannot deliver sustainable cost decreases. Additionally, if the costs of commodities continue to rise, the company’s margins could take a hit as well.

Overall

In conclusion, Kraft will likely see strong financial results despite the challenges that are currently plaguing the company. The company is focused on improving its top line figures through renovation and innovation. It has made the right decision in increasing its prices to make up for the rise in commodity prices, while lowering overhead costs, to widen its margins. Another key selling point for investors is the strong dividend yield of 3.5 percent.

Get Free Updates and Stock Alerts!

*We only send one email per week