An ugly quarter for food companies

With rising energy and commodity costs beginning to show up, Tyson, Kraft and Sara Lee all released disappointing financial reports in November.

Tyson Foods Inc., Springdale, Ark., ended its 2005 fiscal year on Sept. 30 with $26.0 billion in full-year sales, compared to $26.4 billion in its fiscal 2004. Operating income for FY2005 was $765 million compared to $925 million, and net income was $353 million compared to $403 million.

However, the company’s accounting cycle resulted in a 13-week fourth quarter and 52-week year in fiscal 2005, as compared to a 14-week fourth quarter and 53-week year in fiscal 2004.

Tyson’s fourth quarter 2005 sales were $6.5 billion, down from $7.1 billion for FY2004. But operating income was $190 million, up from $178 million, although earnings for 4Q05 included a non-recurring tax net benefit of $15 million.

Bad times for big food.

Chairman/CEO John Tyson said there were “challenging circumstances we faced in fiscal 2005,” but he added, “Our cash flow remains strong. Our chicken business performed well, and our pork business improved in the fourth quarter. However, with export markets closed throughout the year and Canadian import issues, our beef business was difficult.”

In its third quarter, Kraft Foods Inc., Northfield, Ill., earned $674 million, down 13.5 percent from the $779 million in sales from the same period of 2004. Total sales rose to $8.0 billion. While that was a 4.4 percent increase, the cost of goods rose at a much higher rate of 7.2 percent, hitting $5.2 billion from $4.9 billion last year.

Kraft officials project commodity costs will jump $800 million this year — about $200 million more than they previously forecast. As a result, the company lowered its earnings expectation for the final quarter of 2005 by as much as 3.9 percent and also announced it will be raising prices on numerous products.

"The significantly higher costs continue to be a challenge for us, but we remain committed to increasing marketing spending and maintaining appropriate price gaps to improve our top-line momentum in the near term and build brand value across our portfolio for the long term," said CEO Roger Deromedi. "At the same time, given that we expect this higher-cost environment to continue, we are exploring additional pricing actions.”

Kraft also announced another step in its 2004 restructuring plan, eliminating about 600 salaried positions as part of its goal of 6,000 job cuts by 2007. The latest cuts were to occur in November at several locations mostly in North America, including Kraft's corporate headquarters north of Chicago. They will bring the total eliminated under the 21-month-old restructuring to 5,200, leaving 800 positions yet to be identified.

On the other hand, Kraft’s new products are on track to exceed $1.5 billion in gross sales this year, with the South Beach Diet line ahead of the company's expectations by ringing up sales exceeding $100 million since its March launch.

Sara Lee Corp., Chicago, reported an 81 percent drop in its first-quarter 2006 earnings (for the period ending Oct. 1) amid falling sales and several charges as the company restructures itself. Net income was $67 million versus $352 million a year earlier, and sales totaled $4.3 billion, down 2 percent from $4.4 billion a year earlier.

The company attributed the decrease to weakness in its foodservice and North American bakery businesses, where sales dipped 0.3 percent and 2 percent, respectively. Sales of household and body care products slid 4 percent and apparel sales fell 8 percent, although those units are earmarked for sale. But North American meat sales and international beverage and bakery sales all rose 3-4 percent.

Running counter to the bad news, Kellogg Co., Battle Creek, Mich., reported increases of 7.3 percent in sales and 11 percent in income in its third quarter. Sales were $2.6 billion and net income came in at $274.3 million.

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