Kellogg's Shares Sink on 3Q Miss, '11 View

By Matt Egan Retail FOXBusiness

The industry guidelines for children's cereals, for example, would allow them to be advertised if they have around 10 grams of sugar a serving, while the formula used by the government would discourage advertising for cereals that have 8 grams of ... sugars in an equivalent serving. (Reuters)

Iconic cereal maker Kellogg (K) suffered a steeper-than-expected 14% slide in third-quarter earnings due to supply-chain investments, triggering a downgrade to its 2011 financial guidance and a 6% decline in its shares.

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The Battle Creek, Mich.-based maker of Frosted Flakes and Pop Tarts said it earned $290 million, or 80 cents a share, last quarter, compared with a profit of $338 million, or 90 cents a share, a year earlier. Analysts had been calling for EPS of 89 cents.

Kellogg said the decline in earnings was partially due to increased supply-chain costs as it attempts to improve its infrastructure.

Revenue rose 4.9% to $3.31 billion, but failed to meet the Street’s view of $3.41 billion. Gross margins shrank to 40.8% from 43.4%.

“Rebuilding momentum takes time, especially in challenging market environments,” CEO John Bryant said in a statement. “We increased the levels of investment in our supply chain in the quarter, a process we will continue. This multi-year program will improve the infrastructure and drive reliability and capability.”

Kellogg slashed its full-year outlook, projecting non-GAAP EPS of $3.27 to $3.33, compared with its earlier view of $3.33 to $3.40. Even the more optimistic end of the new range would widely trail expectations from analysts for $3.48.

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Internal sales are still expected to rise 4% to 5%, but internal operating profit growth is now seen at just 2% to 4%.

Kellogg said its North American sales increased 4% last quarter to $2.2 billion, but retail cereal revenue was flat. International revenue climbed 7% to $1.1 billion despite a 2% decrease in European sales.

Shareholders expressed serious disappointment with the results and new guidance, sending Kellogg’s stock sinking 6.96% to $50.28 ahead of Thursday’s open. It had been up almost 6% on the year as of Wednesday.

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