Supply chain initiative costs weigh on Kellogg profit

by Eric Schroeder
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BATTLE CREEK, MICH. — Higher costs related to updating the company’s supply chain and reinstating incentive compensation costs hurt third-quarter earnings at the Kellogg Co. Net income for the quarter ended Oct. 1 was $290 million, equal to 81c per share on the common stock, down 14% from $338 million, or 91c per share, in the third quarter of fiscal 2010.

Sales during the quarter increased 5% to $3,312 million from $3,157 million.

“We are continuing to rebuild our momentum as a company,” said John Bryant, president and chief executive officer. “The third quarter offered some compelling signs of improvement, particularly top-line growth and in-market performance. Rebuilding momentum takes time, especially in challenging market environments. We increased the levels of investment in our supply chain in the quarter, a process we will continue. This multi-year program will improve the infrastructure and drive reliability and capability.”

Operating profit for Kellogg’s North America business unit declined 12% to $357 million. The company said the decline was attributable to investments in supply chain initiatives, higher cost of goods sold, and the reinstatement of incentive compensation. Sales for the North America business unit increased 4% to $2,217 million.

On an internal basis, North America Retail Cereal net sales were flat for the quarter due to fluctuations in trade inventory, Kellogg said, but underlying consumption in measured channels grew by about 5%.

Growth in crackers, cookies and wholesome snacks helped drive a 3% gain in internal net sales for the North America Retail Snacks business, while internal net sales for the North America Frozen and Specialty Channels grew 12% behind strength in the frozen foods business.

Operating profit for the company’s International businesses declined 9% during the quarter, mostly due to a 21% decline in internal operating income in Europe, where the difficult trading environment in the United Kingdom and higher input costs weighed on earnings. Internal operating profit also was lower in Asia Pacific, falling 14% primarily due to a customer trading issue in Australia. Strong sales growth helped propel a 19% gain in operating income in Latin America.

Overall sales in Kellogg’s International business increased 7% to $1,095 million.

Kellogg also lowered its earnings-per-share guidance for the year to $3.27 to $3.33, assuming no foreign exchange impact, down from $3.33 to $3.40 projected when second-quarter results were released. The company reaffirmed its internal net sales growth expectation of 4% to 5% for the full year.

“We’re making progress in 2011 by strengthening our innovation pipeline and investing in our supply chain,” Mr. Bryant said. “We expect this progress to continue throughout 2012 as we work to invest further in our ability to deliver dependable growth. As always, we are firmly committed to running the business for the long term and will continue to invest in our business in 2012. We believe this is the best way to ensure sustainable momentum.”

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