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Weak cereal sales dampen Kellogg's 3Q results

Updated: November 6, 2010 8:34AM



BATTLE CREEK, Mich. - Kellogg Co.'s third-quarter net income fell 6 percent as cereal sales softened, competition intensified and the effects of a cereal recall lingered.

The world's largest cereal maker had warned investors it would be a weak quarter and lowered its guidance twice in the past few months. It gave a cautious 2011 outlook on Tuesday.

The news sent Kellogg's stock down 70 cents to $50.05 in premarket trading.

Kellogg, whose brands include Eggo and Keebler, earned $338 million, or 90 cents per share, for the period ended Oct. 2. That's down from $361 million, or 94 cents per share, a year ago.

The company is still feeling the effects of a cereal recall that took place over the summer. Kellogg recalled 28 million boxes of Apple Jacks, Corn Pops, Froot Loops and Honey Smacks cereal in June after complaints about an unusual smell and flavor, which the company blamed on a chemical in the boxes' liners.

The company later identified elevated levels of chemicals in the liner as the cause and said in July that it was a supplier issue. Kellogg also said at that time that it expected the recall would cost it 12 cents per share for the full year.

Cereal also weighed on Kellogg's revenue, which dropped 4 percent to $3.16 billion from $3.28 billion in the quarter.

While the third-quarter news was dour, Kellogg's quarterly performance still managed to come in line with the expectations of analysts polled by Thomson Reuters. These estimates normally take out one-time items.

Cereal revenue fell 6 percent in North America, which Kellogg blamed mostly on continued promotional prices. Its other cereal brands include Special K and Frosted Mini-Wheats.

Declining cereal revenue has been a problem for Kellogg, as the company based in Battle Creek, Mich., has struggled with increased promotions at retailers that cut prices and tougher competition from companies such as Ralcorp's Post Brands.

Snack sales for North America were essentially flat as the strong performance of the wholesale snacks business was able to reduce the impact of declining cookie sales.

International revenue dropped 6 percent, stung by the soft performance of cereal in Europe and weak snack results in Russia. Latin America and Asia Pacific internal sales climbed.

But Kellogg is still downbeat about 2010, maintaining its full-year outlook. The company cut the guidance two weeks ago because of the cereal recall and weak cereal sales. It anticipates 2010 earnings per share will rise between 4 percent and 5 percent.

For 2011, Kellogg predicts low single-digit increases in earnings per share and internal sales. The company said it is looking at 2011 as "a year of strengthening the business."

"As we enter 2011, we feel positive about our strong commercial plans and higher levels of innovation, yet we are also pragmatic and realistic in our 2011 forecasts," CEO David Mackay said in a statement.



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