Kellogg Beats, Raises Guidance

Kellogg Company (K - Analyst Report) reported strong third-quarter results with earnings of 94 cents per share. Earnings were well above the Zacks Consensus Estimate of 83 cents and up 4.4% year over year, despite ongoing cost pressures and the challenging economic environment.

Quarterly net sales were almost flat year-over-year declining marginally by 0.3% to $3.3 billion as the benefits from price/mix (+2.4%) and acquisitions (0.1%), tonnage (+0.7%) were fully offset by adverse currency translations (-3.5%). Internal sales, excluding impact of currency translations, increased 3.0%.

In North America, net sales increased 1.5% (internal growth 2%) driven by Cereals (+2%), Snacks (3%), which was partially offset by declines in Frozen (-3%) and Specialty categories (-3%).

Kellogg’s international operations experienced a net sales decline of 4% (internal sales increased 6%). Internal sales for Kellogg International comprise Latin America's net sales growth of 9%, Asia Pacific's growth of 4% and Europe ’s growth of 5%.

Gross margin for the quarter expanded 127 basis points (bps) to 43.9% versus 42.7% in the comparable prior-year quarter. The increase was primarily due to benefits of pricing and moderation of commodity costs. The operating margin for the quarter also expanded 109 bps to 17.3% versus 16.2% in the prior-year quarter.

Kellogg’s continues to deliver strong cash flow of $978 million year-to-date, including an unfavorable impact from foreign exchange. The company has a debt-to-capitalization ratio of 70%.

Based on the performance year-to-date, management has raised its guidance. Earnings growth is now expected in the range of 10% and 12% on a currency-neutral basis. Previous guidance was 8% to 10%. This excludes the effects of foreign-currency translation.

The company re-affirmed its internal sales guidance of 3% - 4% for the year, which is above the company's long-term targets. Gross margins are expected to increase by approximately 100 basis points, reflecting strong productivity gains and moderating inflation. Management raised guidance for operating profit growth to a range of 8 - 10%, above the long-term target, despite significant re-investment in advertising and up-front costs.

Management also provided an outlook for fiscal 2010. For fiscal 2010, management anticipates internal net sales growth of 2% - 3%, in line with the long-term targets, reflecting lower pricing year-over-year. Up-front costs for 2010 are expected to decline to a range of 14 cents to 16 cents per share, which is expected to positively impact operating profit and net earnings.

Internal operating profit growth is expected in the high single-digit range, above the long-term annual targets. Based on this higher level of forecasted profit growth for 2010, the company further expects fiscal 2010 earnings growth to be in the range of 10 - 12% on a currency-neutral basis. The guidance reflects a second consecutive year of growth above its long-term annual targets.

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