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Weak cereal sales dampen Kellogg’s 3Q results

PORTLAND, Ore. — Kellogg Co. said Tuesday that a drop in cereal sales, intense competition and the lingering impact of some of the largest food recalls in the company’s history have made 2010 a difficult and disappointing year.

The world’s largest cereal maker hopes to regain its momentum in 2011, but executives said they are being pragmatic in their expectations.

“We are addressing the major issues that took us off course in 2010,” said CEO David Mackay. “We are also fully aware of the tough consumer and economic environment in which we are competing and operating, and the degree of volatility that this environment can create.”

Kellogg’s third-quarter net income fell 6 percent and the company issued a cautious 2011 forecast that sent shares down Tuesday.

Kellogg, which makes Eggo waffles, Keebler cookies and other foods, as well as its top-selling cereals, reported that it earned $338 million, or 90 cents per share, for the quarter that ended Oct. 2. That’s down from $361 million, or 94 cents per share, a year ago.

Revenue dropped 4 percent to $3.16 billion.

Kellogg’s cereal revenue fell in part because of promotions and competition, but the company said it expects to raise cereal prices in the coming year — which in turn could lead shoppers to see higher prices in the cereal aisle.

Reverberations continue for Kellogg from a voluntary recall this June of 28 million boxes of Apple Jacks, Corn Pops, Froot Loops and Honey Smacks cereal after complaints that an unusual smell and flavor were making people sick. The company blamed the problem on excess chemicals in box liners it got from a supplier.

The recall couldn’t have come at a worse time, Kellogg said, as those cereals were at the core of its back-to-school promotions. This follows recalls of peanut products and Eggo waffles in 2009 that caused a major disruption in its supply.

Despite the dour third-quarter news, Kellogg’s performance was in line with the average expectations of analysts polled by Thomson Reuters. But the company remained downbeat about 2010 and maintained its full-year outlook, which it had cut twice in recent months.

Kellogg is more optimistic about 2011, when it expects its supply chain to stabilize and plans to introduce more new products. The company slashed its creation of new products during the recession because it believed consumers wouldn’t be willing to try new products, and it hopes the reversal will drive some revenue growth.

For 2011, Kellogg predicts that its earnings per share and its revenue will rise by percentages in the low single digits, excluding the impact of foreign currency.

“We are confident in the future,” Mackay said.

Analysts were not as sure. Standard & Poor’s Equity Research analyst Tom Graves said the outlook for 2011 was disappointing, particularly given the company’s expectation of a flat or mild drop in sales volume on top of profit margin pressures. He reiterated a “Hold” rating on the company’s shares and lowered his target price to $49 from $53.

Shares of Kellogg fell 94 cents, roughly 2 percent, to $49.81 in midday trading.