NEW YORK (Reuters) - Kellogg Co (K.N) raised its sales view for 2011, suggesting that the world’s largest breakfast cereal company is turning around its ailing business, and the news sent its shares up more than 4 percent.
Kellogg, whose brands include Apple Jacks and Corn Pops, had a rough year in 2010 due to a recall of millions of boxes of cereal, deep discounting across the industry, higher raw material costs and a lack of new products.
It said this year would be difficult as well, and forecast a 7 percent increase in the cost of grains, sugar and packaging. It expects to balance that increase with cost cuts and price increases, and by selling a greater proportion of higher-priced items.
As a result, Kellogg raised its 2011 sales forecast to an increase of 3 percent to 4 percent, from a prior forecast of a low single-digit percentage gain.
“We expect significantly better topline performance in 2011 due to increased pricing and a very strong innovation pipeline,” said John Bryant, who took over as chief executive officer in January. “We started to see a gradual improvement in our business in the fourth quarter.”
Kellogg reported earnings on Thursday of $189 million, or 51 cents per share, for the fourth quarter that ended on January 1, up from $176 million, or 46 cents per share a year earlier.
Analysts on average were expecting 51 cents, according to Thomson Reuters I/B/E/S.
Yet Kellogg’s results included an impairment charge related to its China business, which Bernstein analyst Alexia Howard said was not included in forecasts, “implying that underlying results came through better than management had initially expected.”
Howard also cited new Nielsen data showing that Kellogg’s sales rose 6.7 percent in the four weeks that ended January 22, “a significant step-up” from the 2.8 percent growth seen for the last 12 weeks.
Fourth-quarter sales fell 1 percent to $2.86 billion, slightly ahead of the $2.85 billion forecast by Wall Street.
Kellogg has already raised prices on the majority of its portfolio, which includes popular brands such as Eggo waffles, Keebler cookies and Pop-Tarts in addition to cereal.
Bryant told Reuters that it remains to be seen whether the increases will dent sales volume. But he takes confidence in the emergence of what he called “a two-speed economy” — where premium brands like Kashi and Bear Naked are growing again, as higher-income consumers loosen their purse strings.
“At the other end you’ve got people who are really struggling financially, and if anything, we’re seeing some of those people also increase their cereal consumption but that can be because they’re swapping out an evening meal for cereal.”
In the fourth quarter, Kellogg’s North American cereal sales fell 3 percent, but showed improvement from declines of 6 percent in the third quarter and 13 percent in the second.
Kellogg affirmed its forecast calling for full-year earnings per share to rise at a low single-digit rate.
The forecast, along with the solid fourth-quarter results, represent “a sign of stabilization and somewhat of a turn, which is a welcome change relative to the last two or three quarters at Kellogg,” said James Tierney, chief investment officer of WP Stewart, which has $1.7 billion in assets under management.
Kellogg shares rose 4.3 percent, or $2.20, to $52.55 in afternoon trading.
Reporting by Martinne Geller, editing by Dave Zimmerman and Maureen Bavdek