Cereal category, recall pressure Kellogg

by Keith Nunes
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BATTLE CREEK, MICH. – Overall weakness in the cereal category, lower sales within its Eggo business unit and the impact of a breakfast cereal recall due to packaging issues all combined to hinder the profitability of the Kellogg Co. during the second quarter ended July 3. Net income for the quarter was $301 million, equal to 80c per share on the common stock, a decline compared to the same period during fiscal 2009 when net income was $353 million, equal to 93c per share.

Sales for the quarter were $3,062 million, a decline compared to 2009 when second-quarter revenues were $3,229 million.

“Our second-quarter results reflect the deflationary environment in the cereal category, particularly in the U.S. and U.K., softer Eggo sales, and the voluntary cereal recall,” said David Mackay, chief executive officer. “The second-quarter performance was weaker than expected, and we have lowered our full-year guidance to reflect the cost of the recall and the difficult business environment. However, we are anticipating a stronger back half driven by increased innovation, reinvestment in our business and gradual improvement in category trends.”

Kellogg lowered its 2010 guidance for full-year, earnings-per-share growth on a currency-neutral basis to the range of 8% to 10%. The company expects 2010 internal net sales growth to be in the flat to 1% range and internal operating profit growth to be in the 4% to 6% range.

“Our adjusted 2010 guidance reflects the challenges we faced in the first half as well as our commitment to reinvesting in our business for long-term sustainable growth,” said Mr. Mackay. “While the current environment remains challenging, our focus is on improving top-line growth, continuing to implement our cost-savings and productivity initiatives, and reinvesting in our business. We remain committed to running the business the right way for the long term.”

Sales within the Kellogg North America business unit declined 5% during the quarter. The company attributed the decline to lower sales in its North America Retail Cereal segment, the impact of the recall and lower customer inventories. Sales within the company’s North America Frozen and Specialty units declined 9% due to softer Eggo sales.

Operating profit for the North American business declined 15% during the quarter. The company said the cereal recall adversely impacted North America’s operating profit by 13%.

Kellogg International posted a 5% decline in second-quarter 2010 reported net sales. Excluding the effects of currency translation, net sales for Kellogg International were flat. Second-quarter net sales in Europe were down 3% primarily due to weakness in the U.K. cereal business and lower results in the Russia snacks business. Latin America net sales rose 5%, and Asia Pacific net sales grew 3%. Kellogg International operating profit was 7% lower on a reported basis.

For the first half of fiscal 2010, Kellogg’s net income was $718 million, equal to $1.89 per share. The first-half results were an improvement over the same period during the previous year when net income was $675 million, equal to $1.77 per share. Sales for the period were $6,380 million, a slight decline compared to the first half of fiscal 2009 when sales were $6,398 million.

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