UPDATE 2-Kellogg cuts sales forecast as U.S. cereal sales fall

Thu Jul 31, 2014 11:47am EDT

(Adds details from the conference call, background, shares)

By Shailaja Sharma

July 31 (Reuters) - Kellogg Co, the world's largest maker of breakfast cereal, cut its full-year adjusted sales and profit forecasts as demand for its Corn Flakes and Special K cereals continued to wane in the United States, its biggest market.

Kellogg's shares fell as much as 5 percent in morning trading after the company also cut its full-year adjusted profit forecast.

The company reported its fifth straight decline in quarterly sales at its U.S. cereal business, which includes Corn Flakes and Froot Loops, hurt by the rising popularity of other breakfast items such as yogurt and frozen egg sandwiches.

Special K, the company's low-fat cereal brand, has been hit as consumers increasingly want a breakfast that is not only low-fat, but one that is also high on nutrition.

Kellogg, which spends $1.5 billion a year on brand building, will reposition itself with new advertising to focus on emphasizing the nutritional value of its cereals, Chief Executive John Bryant said on a conference call.

"I think we need to change our communication to help people understand how cereal can better meet their needs at breakfast than some of the other alternatives."

Kellogg, which has been battling stiff competition from rivals such as General Mills Inc and cheaper private-label brands, said U.S. cereal business sales fell 4.9 percent in the second quarter ended June 28.

LOWERED FORECAST

Net sales in the Kellogg's U.S. snacks business fell 2.7 percent, its fourth decline in the past five quarters. The U.S. snacks and cereal business together accounted for 46 percent of the company's revenue in the second quarter.

Hurt by the weakness in the two businesses, the company said it expects full-year internal net sales to decrease 1-2 percent compared with its previous forecast of an increase of 1 percent.

Kellogg describes internal sales as sales which exclude foreign currency translation, acquisitions, dispositions, and integration costs.

The company also cut its adjusted earnings forecast for the year ending December to between $3.81 and $3.89 per share from between $3.89 and $3.97.

The Battle Creek, Michigan-based company's net sales in North America fell 3.7 percent.

Total net sales fell 0.8 percent to $3.69 billion, missing the average analyst estimate of $3.71 billion, according to Thomson Reuters I/B/E/S.

Net income attributable to Kellogg fell 16 percent to $295 million, or 82 cents per share. Excluding items, it earned $1.02 per share, in line with the average analyst estimate.

Kellogg's share were down 5 percent at $60.53 in late morning trading. The stock was the biggest percentage loser on the Dow Jones U.S. food producers index, which was down 1.5 percent. (Editing by Robin Paxton and Savio D'Souza)