Kellogg cuts outlook; shares fall 5.5 percent

Mon Apr 23, 2012 1:31pm EDT

1 of 3. Boxes of Kellogg's cereal are stacked in a supermarket in New York in this April 29, 2008 file photo.

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(Reuters) - Kellogg Co (K.N) cut its full-year outlook after a disappointing first-quarter performance, sending the cereal maker's shares down 5.5 percent and pressuring the packaged food sector overall.

The weak results from the world's top cereal maker, with brands like Corn Flakes, Mini-Wheats and Rice Krispies, boded poorly for other packaged food makers, many of which will report earnings this week and next. Shares of the Standard & Poor's packaged food index .15GSPFOOD were down 2 percent on Monday, double the decline of the broader S&P 500 .SPX.

Kellogg, which will report full first-quarter results on Thursday, cited weak U.S. sales in some of its product categories, though it did not say which ones.

But analysts suspect some blame goes to challenges facing the overall cereal market, which may also hurt General Mills (GIS.N), which makes Cheerios.

"The U.S. cereals category shows persistent weakness as it faces competition from Greek yogurt and the expansion of breakfast food items at quick-service restaurants," said Bernstein Research analyst Alexia Howard.

Citing independent sales data, Howard also said U.S. sales volume was weak across several of Kellogg's categories, due to price increases taken to offset higher commodity costs.

Kellogg also sells Pop-Tarts, Cheez-It crackers and Eggo waffles.

The company said on Monday that it now sees operating profit falling 2 percent to 4 percent in 2012, from its prior forecast of flat or up slightly. It said sales should rise 2 percent to 3 percent, down from a prior forecast for 4 percent to 5 percent.

It expects full-year earnings per share to range from $3.18 to $3.30. That is below the analysts' average estimate of $3.48, according to Thomson Reuters I/B/E/S.

OFF TO A ROUGH START

In the first quarter, Kellogg said, net sales fell 1.3 percent, with earnings of $1 per share.

Excluding a one-time benefit, Kellogg's profit was 95 cents per share, missing the analysts' average estimate of 99 cents.

"We are obviously disappointed with the performance of the company in the first quarter of 2012," Chief Executive John Bryant said in a statement. "We faced more significant challenges in both Europe and in some categories in the U.S. than we expected."

Most food and beverage companies raised prices over the past year in response to higher costs for commodities like grains, packaging and fuel. Those price increases often curbed demand as consumers looked for cheaper brands or cut back altogether.

Some analysts expected food makers' results to improve this year, as shoppers got used to higher prices and commodity inflation eases. Yet Kellogg's news raises some doubts.

"We believe Kellogg is closer to the truth -- that the earnings outlook is poor for food companies with U.S. and Western Europe businesses predicated on holding pricing against falling costs," said Janney Capital Markets analyst Jonathan Feeney.

Still, Feeney noted that trends have been soft in Europe for about seven quarters now, and that other companies with significant businesses there -- namely Heinz HNZ.N, Kraft Foods Inc KFT.N and PepsiCo (PEP.N) -- have all seen decent performance there in recent quarters.

Last November, Kellogg said it was spending an additional $70 million in the second half of 2011 to improve its manufacturing after it suffered several blows, including food safety problems.

Kellogg shares were down $2.99, or 5.5 percent, at $51 on the New York Stock Exchange.

(Reporting By Martin Golan)

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