(Reuters) - Kellogg Co (K.N) cut its full-year profit outlook on Wednesday, citing increased spending on advertising and higher distribution costs, sending shares of the Corn Flakes maker sliding 9 percent.
Battle Creek, Michigan-based Kellogg has been spending more on advertising and promotions to drive cereal sales, as consumers have shifted toward healthier low-sugar options, protein bars and yogurt for breakfast.
The company now expects full-year adjusted earnings per share to rise about 7 percent to 8 percent, a downward revision from the prior outlook of a 11 percent to 13 percent rise. Analysts on average had been expecting an 11.9 percent rise in full-year adjusted profit, according to Refinitiv data.
“We are in favor of food companies spending more to grow; however, the size and abruptness of Kellogg’s decision to ‘lean in’ to reinvesting caught us by surprise,” J.P.Morgan analyst Ken Goldman wrote in a note.
Kellogg and its peers have struggled in recent years to increase sales as consumers shift toward healthier eating habits and trendier upstart brands. Intense pricing pressure has also taken its toll, as grocery stores compete aggressively against Amazon.com Inc (AMZN.O) and other online retailers.
“The single hardest thing to do in consumer packaged goods is return to top line growth,” Kellogg Chief Executive Steve Cahillane said on a call to discuss third-quarter earnings.
“Could we have pulled back on some investment in Q3 and delivered more profit? Yes, of course. But we are leaning into investment right now.”
Sales declined 1.3 percent in the three months ended Sept. 29 at Kellogg’s U.S. morning foods unit, which makes Fruit Loops and other cereals. Sales suffered after a June recall of 1.3 million cases of Honey Smacks cereal after it was potentially linked to an outbreak of salmonella contamination.
Kellogg said the business had been improving with a boost from higher Pop Tarts sales.
Sales fell 3.5 percent to $737 million at Kellogg’s U.S. snacks business, its biggest unit.
The company switched its snacks delivery system last year to its more widely used warehouse model to reduce expenses. Previously, delivering its Pringles and Special K cereal bars directly to stores meant it could charge retailers higher prices.
Net income attributable to the company rose to $380 million, or $1.09 per share, from $288 million, or 83 cents per share, a year earlier. Net sales rose nearly 7 percent, driven by Kellogg's acquisition of protein bar maker RXBAR last October. (bit.ly/2AEO7sX)
Reporting by Richa Naidu in Chicago and Uday Sampath in Bengaluru; Editing by Arun Koyyur and David Gregorio