As previously announced on April 24, Kellogg Company (K) has posted first quarter 2012 earnings per share of 95 cents (excluding the impact from the pending Pringles acquisition), 3 cents below the Zacks Consensus Estimate of 98 cents due to weak top-line results.
The world’s largest cereal maker reported revenue of $3.4 billion, down 1.3% in the quarter, owing to the decline in International sales. However, organically (excluding impact of acquisitions, dispositions and foreign exchange), revenues were flat with the prior-year quarter. Revenue was $3.5 billion according to the Zacks Consensus Revenue Estimate.
Kellogg witnessed weak volume growth in some food categories in its U.S. segment. The European business was also sluggish as the region continued to face difficult economic conditions. Rising commodity costs also contributed to the decline.
The maker of popular brands like Pop-Tarts, Keebler and Eggo also reported operating profit of $535 million, down 6.5%. Kellogg’s adjusted operating profit was also down 6.1%.
Segment Details
North America: Kellogg North America sales increased 1.5% to $2.399 billion in the first quarter from $2.364 billion. Organically, North America sales increased 1.6% in the quarter.
The segment posted internal net sales growth of 2.3% in the U.S. Snacks, 7.8% in the U.S. Specialty business and 3.4% growth in the North America Other segment. However, the U.S. Morning Foods and Kashi posted an internal net sales decline of 1.7% in the first quarter of 2012.
Operating profit in the North American region declined 5.1% in the quarter, while it declined 5.0% organically, owing to weak volume growth in the U.S. categories.
International: On the other hand, Kellogg International sales declined 7.1% to $1.04 billion from $1.12 billion in the first quarter of 2011. The international sales decreased 3.7% organically.
The segment posted internal net sales growth of 7.5% and 1.6% in the regions of Latin American and Asia Pacific, respectively. However, the internal net sales in the European business decreased by 10.4% as the region continued to face difficult economic conditions in the region.
Kellogg International's operating profit also declined 10.7% in the first quarter and decreased 9.7% internally.
Other Financial Updates
Kellogg's interest expense was $32.6 million in the quarter, including $26 million gains related to hedging. The effective tax rate was 30.5% in the first quarter.
The company ended the quarter with cash and cash equivalents of $404 million, as compared to $460 million in the prior quarter. Long-term debt was approximately $4.3 billion at the end of March 31, 2012, as compared to $5.0 billion at the end of December 31, 2011.
Kellogg also repurchased $63 million in shares during the quarter under its $2.5 billion three-year share repurchases authorization.
Kellogg also slashed its 2012 financial outlook on April 24, citing weak US volumes and a struggling European business.
For the year 2012, the company expects its internal net sales growth guidance in a band of 2%–3%, which was cut from a prior range of 4%–5%. Operating profit for 2012 is expected in the range of 2%–4%, down from prior expectations that profits would remain flat to slightly up from 2011 levels.
Kellogg expects its adjusted earnings per share to range in between $3.24–3.41 in fiscal 2012, down from the prior guidance of $3.45–$3.52. The guidance excludes any impact from the pending acquisition of the Pringles business from retail giant Procter & Gamble Company (PG).
The $2.7 billion Pringles deal, which will dilute 2012 earnings by 6-11 cents per share, is expected to close in June this year. The Zacks Consensus Estimate for 2012 was $3.34 per share.
Our Recommendation
Overall, we like the company’s strong market position and its continued focus on brand building and innovation. The Pringles deal will provide additional growth opportunity in fast-growing emerging nations. It will also reduce Kellogg’s dependence on its mainstay cereals business which is somewhat struggling. However, we are disappointed with the poor first quarter results and the related cut in guidance. The sluggish cereal business together with rising pressures in Europe keeps us on the sidelines.
Currently, we have a Neutral recommendation on Kellogg Company. The stock carries a Zacks #3 Rank in the near term (‘Hold’ rating).


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