Kellogg raises annual forecasts on higher prices as margin pressure looms

Kellogg's products of U.S. Kellog Company are offered at a supermarket in Zumikon
Kellogg's products of U.S. Kellogg Company are offered at a supermarket of Swiss retail group Coop in Zumikon, Switzerland December 13, 2016. REUTERS/Arnd Wiegmann

Nov 3 (Reuters) - Kellogg Co (K.N) raised its full-year sales and profit forecasts on Thursday as demand for pricier cereals and snacks stays strong in North America amid relentless cost pressures.

The cereal maker's shares were down about 6% at $71.20 as the company warned its profit margins in the fourth quarter would not improve as much as anticipated.

As household budgets, particularly for lower-income consumers, get increasingly pinched due to stubbornly high inflation, analysts have warned that Kellogg could start to lose out to cheaper store-brand cereals.

While the company's sales volumes rose in North America in the quarter, it fell in overseas regions, with company executives saying that Kellogg was starting to see some consumer pushback against higher prices in Europe.

Surging commodity and transportation costs, supply chain challenges and the impact of a stronger dollar on overseas revenue also led to an 18% fall in the company's third-quarter operating profit.

"The whole 'this inflation was going to be transitory' was always obviously ridiculous," Kellogg's Chief Executive Officer Steve Cahillane said.

The company now anticipates more than a 100 basis points decline to its annual gross margin, slightly higher than previously anticipated.

In the reported quarter, however, the Corn Flakes maker was able to pass on price increases to consumers, while seeing little pushback in demand, using its brand power and distribution scale.

Kellogg now expects annual organic net sales to increase by over 10%, compared with its prior outlook of an increase of 7% to 8%.

The company forecast adjusted full-year profit per share to rise more than 3% on a currency-neutral basis, compared with a prior outlook of over 2% growth.

Kellogg's net sales rose 9% to $3.95 billion in the third quarter ended Oct. 1. Analysts had expected revenue of $3.78 billion, according to Refinitiv IBES data.

Reporting by Deborah Sophia and Uday Sampath in Bengaluru; Editing by Shounak Dasgupta

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