Kellogg Beats; Raises Guidance

Kellogg Co. (K - Analyst Report) reported strong second-quarter results with earnings of $0.92 per share. Earnings were $0.10 above Zacks Consensus Estimate and up 12.2% year over year, despite ongoing cost pressures and the challenging economic environment.

Quarterly net sales declined 3.4% year over year to $3.2 billion as the benefits from price/mix (+3.1%) and acquisitions (0.4%) were more than offset by negative tonnage (-0.5%) and currency translations (-6.4%). Internal sales, excluding impact of currency translations, increased 2.6%. Global cereal volume climbed about 2% during the quarter.

In North America, net sales increased 2.3% (internal growth 3%) driven by Cereals (+4%), Snacks (3%), Frozen (5%) and Specialty categories (5%). The cereal category had a strong quarter, with about 4% growth while overall quarterly consumption across all channels was up in the rage of 6% to 7%.

The snacks category had a challenging quarter impacted by the peanut-related recall, which was offset by the direct-store delivery business. Frozen and Specialty categories benefited on effective innovation.

Kellogg’s international operations experienced a net sales decline of 13% (internal sales increased 2%). Internal sales for Kellogg International comprise Latin America's net sales growth of 8%, Asia Pacific's growth of 3% and European decline of 1%. Europe continues to face a tough operating environment and stiff competition.

In Latin America, core brands such as Zucaritas, Corn Flakes and Choco Krispies continued to perform above expectations. In the Asia Pacific segment, South Africa, Korea and India delivered strong net sales growth, while Australia was hurt by challenging negotiation with a retail partner.

Based on the performance in the first half, management raised its guidance. Earnings growth is now expected in the range of 8% and 10% on a currency-neutral basis. This excludes effects of foreign-currency translation. Based on current rates, the company now sees a negative impact from foreign-currency exchange of about 6% to earnings for the full year.

Kellogg's guidance for the year also includes a substantial increase in up-front charges for cost-reduction initiatives to approximately $0.26 per share from the initial expectation of $0.14 per share.

We reiterate a Hold recommendation on Kellogg.

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