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Kellogg Beats on Earnings, Cereals Let Down Sales

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The first quarter of 2014 was another weak one for Kellogg Company (K - Free Report) as U.S. cereal sales remained soft and international results weakened from last quarter.

First-quarter adjusted earnings of $1.01 per share declined 1% from the prior-year quarter due to weak revenues and profits. Earnings came ahead of the Zacks Consensus Estimate of 97 cents as well as management’s expected range of 95 to 98 cents due to a benefit in Other Income and Expense.

Adjusted earnings exclude integration costs related to the Jun 2012 Pringles acquisition, costs associated with Project K restructuring program and a mark-to-market gain. Including these items, reported earnings were $1.12 per share, up 32% year over year.

Revenues & Margins

The world’s largest cereal maker reported revenues of $3.74 billion in the quarter, down 3.1% year over year. Revenues also missed the Zacks Consensus Estimate of $3.81 billion.

While volumes declined 3.5%, price/mix added 1.1% to sales. Currency had a negative impact of 0.7%. The impact of acquisitions and dispositions was flat. Accordingly, organic revenues (excluding impact of acquisitions, dispositions and foreign exchange) declined 2.4% due to another quarter of soft sales in the U.S. Surprisingly; international sales were also weak this quarter.

Kellogg’s adjusted operating profit declined 5.5% to $559 million due to lower sales and timing of cost of goods sold. Profits were weak in the U.S. as well as in Europe and Asia-Pacific. Management had warned that first-quarter consolidated adjusted profit would fall below year-ago levels at the last quarter conference call.

Segment Discussion

North America: Kellogg North America sales decreased 2.9% (down 2.4% organically) from the prior-year quarter to $2.5 billion, hurt once again by choppy cereal sales. Price/mix added 0.5% to revenue growth, while volumes declined 2.9%.

Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, declined 5.5% in the quarter. Kellogg has been witnessing soft sales growth in the U.S. for the past four quarters due to sluggishness in cereals — one of Kellogg’s largest businesses. Sluggish category growth is hurting cereals sales. Lower demand for cereals due to competitive pressures from alternatives such as yogurt, eggs, bread and peanut butter is hurting cereal category growth.

The U.S. Snacks businesses grew 0.3% in the quarter, an improvement from fourth-quarter 2013 levels. The U.S. Specialty Channels business declined 1.7% organically and the North America Other business went down 2.1%.

Adjusted operating profit declined 6.1% in the quarter due to weak volumes.


During the quarter, revenues in Europe decreased 1.7% organically to $708 million. Asia Pacific declined 1.4% organically to $239 million and Latin America decreased 5.3% to $278 million due to new food tax in Mexico which hurt volumes.

Adjusted operating profit declined 0.1% in Europe and 27.3% in Asia Pacific but grew 8.7% in Latin America.

2014 Guidance Retained

In 2014, organic revenues are expected to increase approximately 1%. The sales guidance excludes the impact of currency as well as an extra week in the year.

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 the range of 1–3% to $3.89–$3.97 a share. While aggressive share buybacks are expected to boost earnings, higher taxes (due to new food tax in Mexico) will hurt the bottom line in 2014.

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. The 53rd week is expected to add 8 cents to reported earnings per share for the year.

The organic sales, adjusted operating profit as well as earnings per share guidance are well short of the long-term targets — suggesting that the 2013 woes could continue well into 2014.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). Better-ranked food stocks include B&G Foods Inc. (BGS - Free Report) , Mondelez International, Inc. (MDLZ - Free Report) and McCormick & Company, Incorporated (MKC - Free Report) . While B&G Foods sports a Zacks Rank #1 (Strong Buy), Mondelez and McCormick have a Zacks Rank #2 (Buy).

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