On Sep 17, we issued an updated research report on Kraft Foods Group, Inc. (KRFT).

Kraft reported dismal second-quarter 2014 results, missing the Zacks Consensus Estimate for both revenues and earnings — the second time in a row.

The second-quarter earnings per share of 80 cents increased 5% year over year as operating income growth made up for relatively softer sales.

Soft volumes, market share losses, rising input costs and a higher effective tax rate hurt earnings. Volume benefit from the Easter shift was offset by lower demand and market share losses as the company implemented significant pricing in response to record high input costs, mainly dairy and meat.

Kraft has been struggling with its top line ever since the split from Mondelez International, Inc. (MDLZ) due to broader macro pressures. Several of the company’s product categories — salad dressings, powdered beverages and ready-to-eat desserts — have been soft for the past few quarters due to lower consumption and intense competition. Changes in consumer preferences, shopping behavior and tough consumer spending environment are hurting retail sales. Shopper trips are going down, especially the large ones, as consumers are purchasing only what they need.

Moreover, rising commodity costs is turning out to be a major margin headwind for the food companies in 2014. The cost of cheese/milk reached record highs in the first half of 2014 compelling Kraft to raise prices of most of its cheese products between 5% and 12%. Moreover, record high cost increases of meats, beef, turkey and pork have led to an average increase of 10% across half of Kraft’s cold cuts portfolio. In fact, Kraft has already raised or announced price increase for approximately half of its product portfolio to cover the rising costs of ingredients. Management is losing market share due to volume elasticity as a result of the price increases.

However, Kraft enjoys solid fundamentals — a strong brand portfolio, aggressive cost reduction and aggressive efficiency-improvement initiatives.

In order to improve its performance, Kraft has significantly increased its advertising investments, new product activity and the quality of its marketing, which could result in better results in future quarters.

However, Kraft’s promotional efforts have not been as effective as planned which is another headwind for the top line. The higher advertising and marketing costs will pressure profit growth in the second half if they do not yield desired results.

Other Stocks to Consider

Kraft carries a Zacks Rank #3 (Hold). Better-ranked food stocks include J&J Snack Foods Corp. (JJSF) and The Hain Celestial Group, Inc. (HAIN). Both these stocks carry a Zacks Rank #2 (Buy).