Kellogg Lowers Forecast Amid Weakening Cereal Business, More Competition

Kellogg Co., the largest U.S. maker of breakfast cereal, lowered its profit forecast for the year, citing slumping demand for cereal and heightened competition.

Per-share earnings, excluding some items, will climb 4 percent to 5 percent, the Battle Creek, Michigan-based company said in a statement today. That compared with a previous forecast of 8 percent to 10 percent. This is the second time Kellogg has cut its profit forecast this year.

Chief Executive Officer David Mackay said the cereal maker has faced a “challenging year” after recalling 28 million boxes of cereal in June. Kellogg, whose brands include Froot Loops and Apple Jacks, also is coping with escalating competition from Ralcorp Holdings Inc., which makes Post cereal, and Cheerios-maker General Mills Inc.

“It is unacceptable to have to lower their own bar twice in three months,” David Kolpak, who helps Cleveland-based Victory Capital Management manage $42 billion, said in a telephone interview. “Somebody ought to pay for this.” His firm’s holdings include Kellogg stock.

The shares fell 27 cents to $49.75 at 4 p.m. in New York Stock Exchange composite trading. They have dropped 6.5 percent this year, compared with a 5.8 percent increase in the Standard & Poor’s 500 Index.

The company also said sales will decline 4 percent in the third quarter, or 2 percent when excluding the impact of foreign-currency translation. Sales excluding currency effects may fall about 1 percent this year.

Product Recall

Four months ago, Kellogg began a product recall due to what the company called an “uncharacteristic” flavor and smell in packages of brands including Corn Pops and Froot Loops. The move, which triggered a 13 percent drop in North American cereal sales in the second quarter, has had a “lingering impact” on results, the company said. Kellogg is scheduled to report earnings Nov. 2.

About one-fourth of Kellogg’s total sales come from North American cereal. Results have fallen short of analysts’ estimates in two of the past three quarters, after exceeding them for seven quarters in a row.

“I’m disappointed but not surprised,” said Walter Todd, co-chief investment officer at Greenwood Capital, which owns about 50,000 shares of Kellogg. Todd said he has reduced his position in the company by 50 percent over the past six months and may sell more.

Total sales fell about 2 percent last year as budget-wary consumers bought more private-label products during the economic slump and the company eliminated 30 percent of its North American product line to focus on more profitable items. Kellogg’s other brands include Pop-Tarts, Eggo waffles and Nutri-Grain bars.

Commodity Costs

The foodmaker also is dealing with rising commodity costs as prices for ingredients such as corn and sugar surge. Sugar prices climbed to their highest price in eight months yesterday on forecasts for a smaller cane crop in Brazil, the world’s largest producer. Before today, corn surged 60 percent since the end of May, reaching a two-year high last week, as adverse weather reduced U.S. production.

Minneapolis-based General Mills is raising prices on about one-quarter of its cereal products to cope with “increasing input costs,” according to spokeswoman Kirstie Foster. Kellogg spokeswoman Kris Charles said today the company hasn’t yet raised prices on cereal or other products, and declined to comment on future moves.

Analyst Andrew Lazar of Barclays Capital said in a note to clients today that General Mills’ price increase “will have many willing followers.” Alexia Howard, a New York-based analyst at Sanford C. Bernstein, said in an Oct. 18 report to clients that Kellogg’s cost of goods sold will increase 4.2 percent next year, up from an earlier estimate of 3.6 percent.

-- Editors: Julie Alnwick, Robin Ajello

To contact the reporters on this story: Burt Helm in New York at Bhelm3@bloomberg.net Matthew Boyle in New York at Mboyle20@bloomberg.net.

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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