Kellogg's profit rises but cereal struggles

AP News
Posted: Aug 01, 2013 11:56 AM
Kellogg's profit rises but cereal struggles

NEW YORK (AP) — Kellogg Co.'s profit rose in the latest quarter, but its revenue fell short of expectations as its flagship cereal unit struggled.

The maker of Frosted Flakes, Pop Tarts and Eggo waffles said Thursday that items such as frozen breakfast sandwiches and the acquisition of Pringles chips helped lift overall sales for North America. But the U.S. morning foods unit that includes cereals saw a 3.3 percent decline.

"The breakfast occasion is growing, but there are a lot more choices. Within that, we need (cereal) to stand for something more clearly," Kellogg CEO John Bryant said in an interview.

The company cut its revenue forecast for the year, citing slower growth in the U.S. and other developed markets, as well as the impact of a stronger dollar. Its stock was down 1.6 percent at $65.19; the shares are up more than 38 percent over the past year.

Kellogg has been fighting to get Americans to eat more cereal. General Mills, which makes Cheerios, is facing a similar problem and is deploying a variety of tactics such as marketing children's cereal to adults by playing on their nostalgia for brands such as Lucky Charms.

Despite the challenges, Bryant noted that cereal still accounts for about 30 percent of the breakfast category in the United States and that there's room to add sales among older people and those who are looking for nutritional benefits.

As such, Kellogg recently introduced Raisin Bran with omega-3 and a multigrain version of Special K. Notably, however, Bryant said that its line of Kashi cereals saw volume decline in the quarter, in part because mainstream brands are getting better at touting their health benefits.

Bryant noted that the company is also thinking about cereal in different ways. For example, it recently launched a dairy drink under the Kellogg banner that's positioned as a way to eat cereal on the go. Special K also recently rolled out a hot cereal made with ingredients including quinoa.

"When we talk about innovation, we're not just talking about line extensions," Bryant said. Still, he noted that it would take time to get the category back on a path to growth through such means.

In the meantime, Kellogg is hoping to expand into different areas. The company last year bought Pringles chips to become a bigger player in the salty snacks category. The deal also gives the company greater international reach, since Pringles gets about two-thirds of its revenue from overseas.

When excluding the impact of Pringles, sales in its U.S. snacks business, which includes Cheez-It crackers, declined by 3.2 percent for the quarter.

In its relatively smaller international unit, Kellogg said the Asian, Latin American and European units all saw double-digit growth for the quarter, boosted greatly by acquisitions.

But in Europe, sales slipped 0.3 percent excluding the impact of acquisitions and other items. Kellogg recently relaunched its Special K cereals in the region, reformulating the brand to have more fiber and whole grains.

For the quarter ended June 29, Kellogg earned $352 million, or 96 cents per share. That compares with $324 million, or 90 cents per share, a year ago.

Not including one-time items, it earned $1 per share, more than the 98 cents per share analysts expected.

Revenue rose to $3.71 billion, short of the $3.8 billion Wall Street forecast.

The company now expects revenue to grow by 5 percent for the full year, down from 7 percent.

It stood by its earnings projections of $3.84 to $3.93 per share.


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