Kellogg's profit tumbles in first quarter

by Monica Watrous
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Net sales in the U.S. Snacks segment decreased 1.2%, signaling a better performance than previous quarters but continued weakness for such products as Special K Cracker Chips, Right Bites 100 Calorie Packs and Special K bars.

BATTLE CREEK, MICH. — The Kellogg Co. reported a 44% drop in net income and a 5% decline in sales for the first quarter, but the performance exceeded expectations for the maker of Rice Krispies, Pringles and Pop-Tarts. Improving trends in the cereal business and growth in international markets helped relieve pressure from the negative impact of foreign currency translation and costs associated with the company’s Project K efficiency and effectiveness program, according to the company.

For the quarter ended April 4, Kellogg’s net income tumbled to $277 million, or 64c per share on the common stock, which compared with $406 million, or $1.13 per share, in the year-ago period. Excluding items and currency impacts, comparable first-quarter earnings were $1.04 per share.

Net sales fell to $3,556 million from $3,742 million the year before.

Net sales for Kellogg North America declined 3.7% to $2.4 billion.

Net sales for the U.S. Morning Foods segment declined 2.9% to $776 million, reflecting improvement in the cereal business.

“Overall, we were pleased with the results in the morning foods business in the first quarter,” said John Bryant, chairman and chief executive officer, during a May 5 earnings call with analysts. “The team has done a great job, trends generally improved, and we started to see the benefit where we have invested.”

Net sales in the U.S. Snacks segment decreased 1.2% to $854 million, signaling a better performance than previous quarters but continued weakness for such products as Special K Cracker Chips, Right Bites 100 Calorie Packs and Special K bars.

“So, we continue to face some challenges in our U.S. snacks business, but we’ve seen some success, and we have already made changes,” Mr. Bryant said. “We have some more to come. As I said before, improvement will take some time and will be progressive. However, we’re focusing our investment to drive improvement in 2015 and into 2016.”

The U.S. Specialty Channels segment’s net sales declined 3% to $361 million due to a discrete item.

“In the convenience channel, we increased share in the cracker, wholesome snack, cookie and salty snack categories in the quarter,” Mr. Bryant said. “Consumption of Pringles grew at a strong double-digit rate.”

Net sales in the North America Other segment, which includes U.S. Frozen Foods, Kashi and Canadian businesses, decreased 10% to $433 million.

“We saw good consumption in the frozen foods business in the quarter, although net sales declined due in part to supply disruptions from last year's limited recall of our MorningStar Farms product,” Mr. Bryant said. “This was related to an industry-wide issue with a supplier of cumin.”

Reported net sales fell nearly 14% to $607 in Europe, but currency-neutral comparable sales increased 1% on growth for the Pringles business. Latin America net sales were $295 million, up 6.3%, with currency-neutral comparable sales up about 16%, reflecting broad-based growth across the region. In Asia Pacific, net sales fell 5.3% to $230, but currency-neutral comparable sales increased 4% on good rates of growth in Asian businesses.

For 2015, Kellogg executives continue to expect currency-neutral comparable net sales to remain unchanged, currency-neutral operating profit to decrease between 2% and 4%, and currency-neutral comparable earnings per share to be flat to 2% lower.

As for Project K, the company said the program is on track to generate savings and invest in the business to drive profitable sales growth. Specifically, Kellogg is reinvesting in in-store execution, product innovation, and high-growth emerging markets.

“We are executing the largest restructuring program in the company's history taking out a very large amount of costs and reinvesting that back in the business to drive long-term growth,” Mr. Bryant said. “You’ve seen that throughout our sales capability, investments in our food. You’ve seen our top line starting to improve with growth across our international business and some of our U.S. businesses, so we're on track with our plan to return to stable growth over time. We believe that's the best way to create value for shareholders.”
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