Kellogg net falls more than expected in 3rd qtr on higher costs; cereal maker cuts outlook

November 3, 2011 6:48 AM0 commentsViews: 29

Kellogg net falls more than expected in 3rd qtr on higher costs; cereal maker cuts outlook

BATTLE CREEK, Mich. – Cereal and snack maker Kellogg Co. said Wednesday its third-quarter net income fell 14 per cent, worse than expected, hurt by higher costs related to updating its supply chain and incentive compensation costs.

The world’s largest cereal maker also lowered its earnings guidance below expectations. Company shares fell 7 per cent in premarket trading.

Kellogg and other food makers have raised prices to offset soaring costs for ingredients and fuel, trying to find the tricky balance between how much prices can increase before consumers forgo brand-name loyalty and opt for low-priced rivals. When Kellogg competitor General Mills reported earnings last month, it said price increases, which climbed almost 5 per cent during the quarter, helped results.

Kellogg, the maker of Frosted Flakes, Keebler cookies and Eggo waffles, said net income fell to $290 million, or 80 cents per share, in the three months ended Oct. 1. That compares with $338 million, or 90 cents per share, last year. Analysts expected 89 cents per share, according to a poll by FactSet.

Money spent to improve Kellogg’s supply chain hurt net income by about 8 percentage points, while incentive compensation costs hurt results by 12 percentage points, Battle Creek, Mich.-based Kellogg said.

The supply chain improvements will take several years and “improve the infrastructure and drive reliability and capability” of Kellogg, said CEO John Bryant.

Revenue rose 5 per cent to $3.31 billion, from $3.16 billion last year. Analysts expected $3.41 billion.

In North America revenue rose 4 per cent to $2.2 billion. Sales of cereal were flat, which the company blamed on fluctuation in trade inventory. Snack sales rose 3 per cent on demand for crackers and cookies. Frozen food sales were also strong.

Internationally, revenue rose 7 per cent to $1.1 billion, boosted by the weaker dollar. Results in Latin America were strong and Europe continued to improve.

Kellogg said it continues to expect revenue will grow 4 per cent to 5 per cent in 2011, but it lowered its net income guidance because of continued investment in its supply chain. It now expects net income of $3.35 to $3.41 per share, from prior guidance of $3.42 and $3.49 per share. Analysts expect $3.48 per share.

In 2012 the company also expects revenue to rise 4 per cent to 5 per cent with net income, excluding currency fluctuation, up 2 per cent to 4 per cent.

Shares fell $3.79, or 7 per cent, to $50.25 during midday trading. The stock had been up 6 per cent since the beginning of the year.

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