July 29, 2010 / 8:45 PM / in 7 years

UPDATE 5-Kellogg misses view, cuts forecast-shares fall

* Q2 EPS 79 cents vs year-earlier 92 cents

* Sales fall to $3.06 bln from $3.23 bln

* Sees 2010 EPS up 8-10 pct; prior view was up 11-13 pct

* Shares close down 6.9 percent (Adds details on Michigan oil spill, analyst estimates; updates shares to closing)

By Martinne Geller

NEW YORK, July 29 (Reuters) - Kellogg Co (K.N) reported a lower-than-expected quarterly profit on Thursday and cut its full-year forecast, sending its shares down nearly 7 percent, as a big cereal recall and weak cereal sales and pricing took a toll.

The world’s largest cereal maker also said results were pressured by lower Eggo waffle sales, retailers clearing out inventory, promotions from a rival and currency fluctuations.

Janney Capital Markets analyst Jonathan Feeney said Kellogg’s results felt like a “kitchen sink quarter”.

“The only thing not called out is an ‘aliens took away cereal in a UFO’ factor,” Feeney said.

“Cereal has been a great category for a long time, and Kellogg will figure it out,” he added, “But at what cost?”

Kellogg said net income fell to $302 million, or 79 cents per share, in the second quarter ended July 3, from $354 million, or 92 cents per share, a year earlier.

Excluding the impact of the recall, which led to lost sales and unexpected costs, earnings were 89 cents per share.

Analysts on average were expecting 94 cents, according to Thomson Reuters I/B/E/S, but several analysts including those from Barclays Capital and JP Morgan, included the impact of the recall in their estimates.

Quarterly net sales fell 5 percent to $3.06 billion, missing analysts’ estimate for $3.29 billion. Excluding the impact of currency fluctuations, net sales fell 4 percent, with one percentage point of the drop related to the recall and another related to weak Eggo waffle sales.

Net sales fell 5 percent in both North America and international markets.

In North America, cereal sales fell 13 percent.

Last month, Kellogg recalled 28 million boxes of cereal from U.S. stores after about 20 people complained about a “waxy” smell and flavor coming from box liners.

The company also said on Thursday that it closed a manufacturing plant in Battle Creek, Michigan for a few hours on July 27 after the Enbridge (ENB.TO) oil spill in the Kalamazoo River created an unusual smell in the Battle Creek area, where Kellogg also has its headquarters.

“Other than that brief precautionary closure, there’s been no impact of the spill on our business,” Kellogg spokeswoman Kris Charles said.

BACK HALF LOOKS BETTER

Kellogg said it expects the second half of the year to look a little better than the first half, helped by easing comparisons with the year-earlier period, new products and a gradual improvement in category trends.

But the company, which makes Pop-Tarts and Keebler cookies in addition to cereals such as Corn Flakes and Froot Loops, lowered its 2010 earnings forecast. It now predicts growth of 8 percent to 10 percent, down from its prior view for growth of 11 percent to 13 percent.

After a 1 percent decline in net sales in the first half of the year, Kellogg predicted an increase of 1 percent to 2 percent for the second half. That should result in full-year net sales ranging from flat to up 1 percent, excluding currency fluctuations, the company said.

The company sees “a better back half, but we’re not calling for any runaway turnaround,” Chief Executive David Mackay said in an interview, noting that consumers remain focused on buying products that are on sale.

Mackay said promotions, such as those initiated by rival cereal maker Ralcorp Holdings Inc RAH.N, have driven down pricing in the cereal aisle.

“You’re actually seeing deflation, which we’ve not seen for 20 or 30 years,” Mackay said. “Our belief is while that might last another quarter or two ... we’ll see more normal performance in the category.”

Mackay said discounting may ease in future quarters as food manufacturers seek to maintain profit margins in the face of rising commodity costs. He said it was premature to discuss the pricing outlook for next year.

Kellogg said it now expects a 4 percent to 5 percent rise in commodity costs this year, up from a prior forecast for a 3 percent to 4 percent increase, due to increasing costs of packaging materials and sugar.

Kellogg shares fell $3.54 or 6.9 percent to $47.98. Through Wednesday, the shares had fallen 3 percent this year, farther than the 0.9 percent decline in the Dow Jones U.S. Food Producers Index .DJUSFO. (Reporting by Martinne Geller, editing by Gerald E. McCormick and Leslie Gevirtz)

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