UPDATE 2-Kellogg revenue misses as cereal sales stay soggy

Thu Feb 6, 2014 11:16am EST

(Adds analyst, CEO comment, details on outlook, updates share movement)

By Siddharth Cavale

Feb 6 (Reuters) - Kellogg Co, the world's largest maker of breakfast cereals, reported lower-than-expected quarterly revenue as sales of cereals fell for the third time in a row in the United States.

Shares of Kellogg, which also sells Pringles chips and Keebler cookies, fell as much as 3 percent in early trading to their lowest in more than a year.

The maker of Kellogg's Corn Flakes, Froot Loops, Special K and Rice Krispies cereals has been battling intense competition from General Mills Inc and cheaper private-label brands.

Increasing popularity of yogurt, frozen egg sandwiches and other breakfast items has also hit Kellogg's U.S. Morning Foods business, where sales fell 4 percent in the fourth quarter.

These sales exclude the effects of foreign currency translation, acquisitions, dispositions, and integration costs.

"We expect that the sales trends we've seen in several of our businesses in 2013 will continue into 2014 and first-quarter sales could be down slightly," Chief Financial Officer Ronald Dissinger said on a conference call with analysts.

He expects gross margin in the first quarter to be flat to down slightly.

Kellogg said it expected 2014 adjusted earnings to rise 1-3 percent, translating to $3.97-$4.05 per share. It expects internal sales to grow 1 percent.

Analysts on average were expecting Kellogg to earn $4.05 per share for the full year.

JP Morgan analyst Ken Goldman called the forecast "unimpressive," and maintained his "underweight" rating on the stock.

The company said it plans to invest in packaging, shopper programs, mobile and in-store ads as it looks to reverse the decline in cereal sales.

The company will also develop new healthier foods such as those infused with omega 3 and special cakes with quinoa grain to address evolving consumer tastes.

To cut costs the company had launched a four-year cost cutting program, called Project K, in November, under which it plans to cut about 7 percent of its workforce by 2017.

The company said it expects to save $50 million-$60 million for the full year from Project K.

Expenses related to the project are expected to hurt full-year earnings by 60-65 cents per share in 2014, while adjusted gross margins are expected to increase by about 40-50 basis points, Dissinger said.

SERIAL DECLINE

Battle Creek, Michigan-based Kellogg reported a 2.8 percent fall in total sales in North America in the fourth quarter.

Net income attributable to the company was $818 million, or $2.24 per share, in the fourth quarter ended Dec. 28, compared with a loss of $32 million, or 9 cents per share, a year earlier.

Kellogg earned 83 cents per share, excluding items, helped by cost cuts.

Revenue fell 1.7 percent to $3.50 billion.

Analysts on average had expected a profit of 82 cents per share on revenue of $3.53 billion, according to Thomson Reuters I/B/E/S.

Kellogg's shares were down 0.7 percent at $56.96 in late morning trading on the New York Stock Exchange on Thursday. (Reporting by Siddharth Cavale in Bangalore and Lisa Baertlein in Los Angeles; Editing by Kirti Pandey, Maju Samuel and Saumyadeb Chakrabarty)

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