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Kellogg Misses, Keeps View

Zacks Equity Research

After delivering positive earnings surprises for the past four quarters, Kellogg Company (K) missed the Zacks Consensus Estimate for both earnings and revenues in the first quarter of 2013.

Adjusted earnings of 99 cents per share missed the Zacks Consensus Estimate of $1.02 per share by 2.9%. The first-quarter earnings also declined 8.3% from the prior-year quarter’s earnings of $1.08 per share due to higher costs and headwinds from the Venezuela currency devaluation (3 cents). Revenues were also not very encouraging, but Kellogg re-affirmed its 2013 outlook.

Adjusted earnings exclude integration costs related to the Pringles acquisition and mark-to-market-adjustments. Including these charges reported earnings were 85 cents per share. Kellogg acquired Pringles snack business from Procter & Gamble (PG) in June last year. With the Pringles deal, Kellogg transformed itself from what was essentially a large U.S. snacks business to a true global snacks player.

Revenues & Margins

The world’s largest cereal maker reported revenues of $3.86 billion in the quarter, up 12.2% year over year, helped mainly by the Pringles acquisition. Revenues marginally missed the Zacks Consensus Estimate of $3.946 billion.

Volumes added 1.4%, while price/mix added 0.8% to sales growth, both considerably lower than the last quarter. Acquisitions added 11.0% to top-line growth (mainly due to Pringles) while dispositions pulled it down by 0.1%. Currency had a negative impact of 0.8%. Accordingly, organic revenue growth (excluding impact of acquisitions, dispositions and foreign exchange) was only 2.2%.

Significant growth in Latin America, some improvement in Europe and the strong performance of its Pringles business were offset by sluggishness in snacks and Asia Pacific.

As expected, Kellogg’s adjusted operating profit declined 5.8% due to higher costs of input and other cost increases.

Segment Discussion

North America: Kellogg North America’s sales increased 8.1% from the prior-year quarter to $2.59 billion in the first quarter, helped mainly by Pringles business. Organically, segment sales increased only 1.7% as positive sales growth in cereal, specialty and frozen businesses was partially offset by decline in snacks. Price/mix added 0.5% to revenue growth, while volumes grew 1.2%, less than last quarter’s 3.4%.

Organically, the U.S. Morning Foods and Kashi business grew 1.6%, U.S. Specialty was up 3.4% and North America Other segment (includes U.S. Frozen and Canada businesses)was up 7.4%. However, the U.S. snacks business declined 1.7%.

Operating profit declined 3.5% organically to $422 million due to high commodity costs.

International: Revenues in Europe improved 2.6% organically to $692 million, showing some signs of improvement due to strong growth in the U.K. Asia Pacific grew only 0.3% organically to $267 million, while Latin America grew 7.4 % in the quarter to $308 million.

Adjusted operating profit declined 5.6% in Latin America and 30.6% in Asia Pacific. Profits were however, almost flat in Europe.

2013 Guidance Maintained

Kellogg maintained its previously provided outlook for 2013. For 2013, Kellogg expects net sales growth to be approximately 7%, including a 5% gain from Pringles and a 1% headwind from currency. Accordingly, organic sales are expected to increase by approximately 3%, at the lower end of the long-term goals.

Growth in 2013 is expected to be achieved on the back of higher advertising investments (in digital space and with Hispanic-oriented programs) and consumer promotions, and solid innovation launches.

Reported earnings are expected to grow between 5% and 7%. Reported earnings exclude the impact of mark-to-market adjustments but include Pringles’ integration costs of between 12 cents and 14 cents per share. However, excluding Pringles’ integration costs and mark-to-market adjustments, adjusted earnings are expected to be between $3.82 and $3.91 per share.

Reported operating profit (excluding impact of mark-to-market adjustments) is expected to increase at a higher rate than earnings growth.

New Share Buyback

The board of directors approved a new $1 billion share buyback program which will expire in April 2014.

Kellogg carries a Zacks Rank #2 (Buy). Some other food companies you may want to consider include Flower Foods Inc. (FLO), with a Zacks Rank #1 (Strong Buy) and J&J Snack Foods Corp. (JJSF) with a Zacks Rank #2 (Buy).

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Read the Full Research Report on PG

Read the Full Research Report on JJSF

Read the Full Research Report on FLO

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