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Kellogg Crashes, Outlook Bleak

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Kellogg Company ([url=]K[/url]) recently posted weak net sales, operating profits and foreign currency translation, on the back of softness in the cereal category, declining Eggo sales and the impact of the voluntary recall of select packages of breakfast cereals.

The quarterly earnings of 79 cents were way behind the Zacks Consensus Estimate of 94 cents, plunging 15% from 92 cents delivered in the prior-year quarter. Excluding foreign currency translation, earnings per share declined 11%. Moreover, Kellogg estimated that the impact of the recall of select packages, including lost sales reduced its earnings by approximately 10 cents in the reported quarter.

Kellogg, one of the world's largest cereal makers, lowered its fiscal 2010 earnings per share growth target to 8% to 10%, excluding foreign currency translation. Kellogg estimates the impact of the recall, including lost sales, to reduce earnings per share by approximately 12 cents for fiscal 2010.

Total net sales for the quarter dropped 5% to $3,062 million, whereas operating profit plummeted 13% to $483 million. Excluding the effect of foreign currency translation, net sales decreased 4% and operating profit declined 11%, attributable to the voluntary recall. Kellogg also confirmed that it expects net sales to remain flat to 1% and operating profit between 4% and 6%, excluding foreign currency translation in fiscal 2010.

Kellogg North America sales fell 5% to $2,064 million, whereas excluding foreign currency translation, sales growth decelerated 6%. North America Retail Cereal posted a sales decline of 13%, excluding foreign currency translation, while revenues in The Frozen and Specialty Channels businesses dropped 9%.

However, an solid performance in the wholesome snacks categories contributed to the increase in the Retail Snacks sales of 1%, excluding foreign currency translation. Operating profit plunged 15% to $362 million during the quarter and 16% excluding foreign currency translation. In addition, the voluntary cereal recall adversely impacted operating profit by 13%.

Kellogg International sales declined 5% to $998 million. Excluding foreign currency translation, International sales were flat during the quarter, registering sales growth rates of 5% in Latin America and 3% in Asia-Pacific regions, with declines of 3% in Europe. Operating profit dropped 7% to $167 million, whereas excluding foreign currency translation, operating profit was flat during the quarter.

The company ended the quarter with cash and cash equivalents of $471 million, total long-term debt of $3,915 million and shareholders’ equity of $2,384 million. Kellogg generated free cash flows of $446 million during the quarter. The company also reduced its cash flow guidance to $1.15-$1.20 billion. Kellogg also purchased $208 million worth of shares in the quarter under its $2.5 billion share repurchase program for a period of three years from 2010 to 2012.

On July 23, Kellogg‘s board of directors also declared a dividend of $0.405 per share, payable on September 15, 2010, to shareowners of record at the close of business on September 1, 2010.

Rival cereal maker Kraft Foods Inc. ([url=]KFT[/url]) is scheduled to release its second-quarter earnings on August 5, 2010.

Another competitor, General Mills Inc. ([url=]GIS[/url]), reported weak fourth quarter fiscal 2010 results on June 29, with an adjusted earnings decline of 4.6% to 41 cents a share and an adjusted earnings increase of 16% to $2.30 per share in fiscal 2010. Both the quarterly and yearly results were in line with the Zacks Consensus Estimate.

Kellogg, in order to drive profits, has been resorting to cost-cutting measures to ease sales pressures, given the stiff competition in food categories. Going forward, we expect this growth to ease, as Kellogg continues to face downward pressure in the weak economy.

Although Kellogg has a leading market share position, strong brand equity and solid operating earnings growth, we expect a bleak 2010 outlook for its cereal category, particularly in the U.S. and UK, attributable to plummeting Eggo sales and the voluntary cereal recall.

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