Kellogg Company (K) has posted third-quarter 2011 earnings of 80 cents per share, missing the Zacks Consensus Estimate of 89 cents. The earnings also lagged the prior-year earnings of 90 cents per share by 11%. On a currency-neutral basis, the earnings in the reported quarter plummeted 13% year over year.
Kellogg’s results were driven by weak economic environment, increased cost of goods sold, increased supply-chain costs and due to the reinstatement of incentive compensation costs.
Quarter in Detail
Total net sales in the quarter jumped 5% to $3.3 billion, which lagged the Zacks Consensus Estimate of $3.4 billion. Operating profit however declined 14% to $464 million. Excluding foreign currency translation, sales rose by 3% and operating profit declined 16%.
The decline in sales and operating profit was partially due to the acceleration of costs related to supply-chain initiatives. Further, increased supply-chain costs resulted in approximately 8 points of the decline and the reinstatement of incentive compensation costs led to the decline of 12 points.
Kellogg North America sales increased 4% to $2.2 billion, both including and excluding the foreign currency translation. North America Retail Cereal sales were flat, due to trade inventory fluctuations; while Retail Snacks posted sales growth of 3%, driven by growth in crackers, cookies, and wholesome snacks. North America Frozen and Specialty Channels grew 12% driven by growth in the Frozen Foods business.
Kellogg International sales jumped 7% to $1.1 billion, while it increased 2% excluding foreign currency translation. Sales fell 2% in Europe, while it increased 9% in Latin America and 2% in Asia-Pacific regions.
Kellogg’s interest expense was $58 million in the quarter and the effective tax rate was 27%.
Capital Structure
The company ended the quarter with cash and cash equivalents of $582 million, total long-term debt of $5.3 billion and shareholders’ equity of $2.3 billion.
Kellogg generated free cash flow of $877 million through the third quarter of 2011. Kellogg also repurchased nearly $690 million in shares through the third quarter of 2011, under its $2.5 billion three-year share repurchases authorization.
Guidance
Following the earnings results, Kellogg reaffirmed its full-year 2011 internal net sales growth guidance to a range of 4% to 5%. The increased net sales outlook is expected to offset anticipated higher cost pressures. For 2012, internal net sales are expected to grow by 4% to 5%, above long-term annual targets, reflecting price/mix benefits and a strengthening innovation pipeline.
The company lowered its 2011 internal operating profit guidance to a range of down 2% to 4% due to the impact of the third quarter results and expected continued investments in supply chain during the remainder of the year. For 2012, Kellogg expects growth in operating profit to be below its long-term annual targets, as it continues to invest in the future.
Kellogg also expects its full-year 2011 guidance of currency-neutral earnings per share growth to be approximately flat on a year-over-year basis. Assuming no foreign exchange impact, this implies earnings per share of approximately $3.27 to $3.33. Further, the company estimates a foreign exchange benefit of 8 cents, which would result in reported 2011 earnings per share guidance in the range of $3.35 to $3.41.
For 2012, Kellogg expects currency-neutral earnings per share to grow 2% to 4% including a benefit from the three-year $2.5 billion share repurchase program and the impact of continued investments in supply chain, the re-implementation of SAP, and an increase in the level of investment in brand building.
Headquartered in Battle Creek, Michigan, Kellogg engages in manufacture and marketing of ready-to-eat cereal and convenience foods. General Mills, Inc. (GIS) and Ralcorp Holdings Inc. (RAH) are its competitors.
Currently, Kellogg holds a Zacks #3 Rank, translating into a short-term Hold rating. On a long-term basis, we maintain a Neutral recommendation on the stock.
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