Kraft Foods (NYSE:KFT) reported a 13% drop in profits for its first quarter due to rising input costs. The Northfield, Illinois-based food-maker saw a rise in sales, but continued to have profit margins squeezed. The company still came in ahead of low analysts estimates, and what it does moving forward is important.

On Wednesday April 30 2008, Kraft reported that it earned $608 million (40 cents per share) in the first quarter of 2008 down from $702 million (43 cents per share) a year earlier. The results are not entirely comparable, however, since Kraft benefited from a one time 3 cent earnings per share in the first quarter of 2007 from its split with Altria Group Inc. (NYSE:MO). Excluding that 3 cent benefit, along with other one time and special items, earnings per share remained flat at 44 cents. This was substantially higher than consensus analyst expectations of 40 cents per share according to Thompson Financial. This was good news for the stock and shares rose around 3% on the new information to close on April 30, 2008 at $31.63 per share.

Revenues
Results were more impressive on the top line. Kraft, which houses food brands like Oscar Meyer hotdogs, Maxwell House coffee and Oreo cookies, reported a 21% increase in net revenues for the quarter to $10.4 billion from $8.6 billion a year earlier. Revenues came in around $600 million ahead of analyst estimates. Sales grew 5.8% in North America, which is strong considering the weak U.S. economic landscape. Gross Domestic Product (GDP) was reported to have grown at 0.6% for the first quarter showing that the economy in the U.S. is at a standstill. Kraft reported 50.5% growth internationally, including 55.4% growth in European markets and 42.9% growth in emerging markets. The first quarter saw impressive growth for Kraft brands worldwide, as it increases market share against competitors like ConAgra Foods (NYSE:CAG) and Sara Lee Corp. (NYSE:SLE).  (To learn more about revenues, read Financial Statements: Revenue.)

Food Prices Continue To Squeeze
Despite Kraft’s robust sales growth, profits remained stagnant when stripping out one-time and special items. The reason is that the company continues to suffer from the rising costs of ingredients. This has been a problem for many food makers, and the sharp increase in recent years has caught many of them off guard. Gross profit margins slipped to 33.6% from 35.5% a year earlier, and operating margins slipped to 11.2% from 13.1%. Kraft has been slow to pass on the higher input costs, on fears that it will damage demand from its consumer base, but has been working on its margins, and despite the decrease year over year, margins improved sequentially over the fourth quarter of 2007. The quarter showed many positive moves from Kraft, but increasing input costs pose challenges to them and other food producers. Despite some improvement, I would stay away from the stock for the time being. (For more on how companies reduce the risk of higher input costs, see Corporate Use Of Derivatives For Hedging.)

The Bottom Line
Kraft reported a fairly impressive quarter despite a decline in net profits. The company saw demand for its products increase, especially outside of North America, and came in with better than expected earnings. I believe the company is making some of the right moves, but needs to do more to improve margins. Because of rising costs, I would remain on the sidelines for the time being.