Kellogg's profit drops 17%, thanks to cheaper brands World's No. 1 cereal maker expects yearly earnings to decline as much as 15%

August 01, 1998|By BLOOMBERG NEWS

BATTLE CREEK, Mich. -- Kellogg Co. said second-quarter earnings fell 17 percent and warned of further declines, as the world's largest cereal maker lost sales to cheaper supermarket brands.

The maker of Frosted Flakes and Rice Krispies said net income fell to $143.2 million, or 35 cents a diluted share, from $171.6 million, or 41 cents, before a charge a year ago. That missed the 37 cents expected by analysts surveyed by First Call Corp.

Revenue fell slightly, to $1.71 billion from $1.72 billion.

Kellogg's 1998 earnings will fall as it spends more on promotions to regain sales lost to Quaker Oats Co. and Ralcorp Holdings Inc.

Profit will decline as much as 15 percent over 1997's earnings, to about $1.45 a share, less than the $1.77 predicted by analysts. Kellogg said it may cut some prices to fight lower-priced products, though it didn't disclose details.

"This [announcement] is the worst of all worlds," said Nomi Ghez, a Goldman, Sachs & Co. analyst who has a "market perform" rating on Kellogg. "It directs us to significantly lower estimates, but leaves all the uncertainty about prices in place."

John O'Neil, a BT Alex Brown Inc. analyst who once was a vocal supporter of the company, downgraded Kellogg to "market perform" from "buy."

Kellogg's shares fell $2.375 to close at $33.0626, after touching $32.9375, a 52-week low. General Mills, maker of Cheerios fell $1.625 to $61.9375. Quaker Oats fell $2.625 to $52.875 and Ralcorp Holdings Inc. rose 25 cents to $19.375.

Kellogg's U.S. cereal unit sales fell 5.6 percent in the quarter, slightly better than analysts expected.

The company's share of the $7.5 billion-a-year U.S. cereal market improved slightly in the last four weeks of the quarter to 33 percent from 32 percent, because of some of its promotions, the company said.

Over a 52-week period, however, the company's market share has fallen below 32 percent.

Analysts said Kellogg will continue to lose market share so long as prices for some of its brands, such as Frosted Mini-Wheats NTC and Rice Krispies, remain at least $1 a box more than supermarket brands and other knockoffs.

"Pricing is one part of our overall strategy," said Richard Lovell, a Kellogg spokesman. "It may be appropriate to raise or lower prices on certain brands, but we do not have a plan for an across-the-board price cut."

Pub Date: 8/01/98

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