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Kellogg Beats on Q4 Earnings; Revs Soft

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As expected, slower sales in the U.S., hurt Kellogg Company’s (K - Free Report) results once again as the world’s largest cereal maker barely managed to beat the Zacks Consensus Estimate for earnings but missed the same for revenues in the fourth quarter of 2013.

Fourth-quarter adjusted earnings of 83 cents per share came ahead of the Zacks Consensus Estimate of 82 cents by a penny. Fourth-quarter earnings increased 18.6% from the prior-year quarter as a softer top-line performance was offset by overhead cost savings and lower taxes.

Adjusted earnings exclude integration costs related to the Jun 2012 Pringles acquisition, costs associated with the four-year efficiency enhancement program Project K and a huge mark-to-market gain. Including these items, reported earnings were $2.24 per share, much higher than a loss of 9 cents in the prior-year quarter.

Revenues & Margins

The world’s largest cereal maker reported revenues of $3.50 billion in the quarter, down 1.7% year over year due to another quarter of soft sales in the U.S. Revenues also slightly missed the Zacks Consensus Estimate of $3.51 billion.

While volumes declined 1.6%, price/mix added 0.7% to sales. Currency had a negative impact of 0.8%. Acquisitions and dispositions’ impact was flat. Accordingly, organic revenues (excluding impact of acquisitions, dispositions and foreign exchange) declined 0.9% as improved sales in international markets was offset by relatively weaker sales in the U.S.

Kellogg’s adjusted operating profit grew 8.8% to $1.26 billion as weak profits in the U.S. were offset by strong gains in Asia Pacific and Europe.

Segment Discussion

North America: Kellogg North America sales decreased 2.8% (down 2.6% organically) from the prior-year quarter to $2.25 billion in the fourth quarter, hurt again by choppy sales in cereals and snacks. Price/mix added 0.4% to revenue growth, while volumes declined 3.0%.

Organically, the U.S. Morning Foods and U.S. Snacks businesses declined 4% and 3.5%, respectively. Kellogg has seen slower-than-expected sales growth in the U.S. for three quarters in a row due to sluggishness in snacks and cereals — two of Kellogg’s largest businesses. While sluggish category growth is hurting cereals, weakness in crackers and cookies is taking a toll on the snacks business.

While the U.S. Specialty Channels business grew 5.1% organically, the North America Other business declined 2.9%.

Adjusted operating profit declined 2.9% to $223 million in the quarter due to weak volumes.


Revenues in Europe improved 1.2% organically to $716 million. Asia Pacific grew 4.2% organically to $254 million, while Latin America grew 3.0 % in the quarter to $281 million.

Adjusted operating profit declined 4.7% in Latin America but grew 143.3% in Asia Pacific and 15.3% in Europe.

Annual Results

In fiscal 2013, the company witnessed a 4.2% increase in revenues to $14.79 billion, marginally missing the Zacks Consensus Estimate of $14.82 billion. The growth rate was at the lower end of the company’s guidance range of 4%–5%. Organically, sales increased 0.3% in the year.

Adjusted earnings were $3.77 per share, which beat the Zacks Consensus Estimate of $3.76 by a penny. Adjusted earnings grew 4.4% year over year and were in line with management’s expectation of being toward the lower end of the guidance range of $3.75 to $3.84.

Introduced 2014 Guidance

In 2014, organic revenues are expected to increase approximately 1%, which is slightly better than the 2013 level. Also, adjusted operating profit is expected to either remain flat or grow up to 2% in the year. Adjusted earnings per share (excluding currency headwinds) are expected to increase in a range of 1%–3%.

The adjusted operating profit and earnings guidance exclude the impact of market adjustments, costs related to Project K, and the expected benefit from an extra week in 2014.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). Better-ranked food stocks include Green Mountain Coffee Roasters, Inc , The Hain Celestial Group Inc. (HAIN - Free Report) and Kraft Foods Group, Inc . While Green Mountain and Hain Celestial sport a Zacks Rank #1 (Strong Buy), Kraft enjoys a Zacks Rank #2 (Buy).

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