Kellogg Co. (NYSE:K) reported lower second quarter 2010 internal net sales, internal operating profit and currency-neutral earnings per share, reflecting weakness in the cereal category, lower Eggo sales, and the impact of the June 25 voluntary recall of select packages of breakfast cereals.
According to a news release, the company is reducing its 2010 internal net sales, internal operating profit, and currency-neutral earnings per share guidance.
Second quarter net earnings were $302 million, a 15 percent decline over the same quarter a year ago. Second quarter reported earnings per diluted share decreased 14 percent to 79 cents and decreased 11 percent on a currency-neutral basis. The estimated impact of the recall, including lost sales, reduced earnings per share by approximately 10 cents in the quarter and will reduce earnings per share by approximately 12 cents for the full year.
Reported net sales in the second quarter declined 5 percent to $3.1 billion. Internal net sales, excluding the effect of foreign currency translation, decreased 4 percent from the prior year. Total reported operating profit in the quarter decreased 13 percent to $483 million.
Internal operating profit decreased 11 percent, driven primarily by the voluntary recall. Reported gross margin contracted 90 basis points to 2.6 percent in the quarter due to the impact of the recall.
“Our second quarter results reflect the deflationary environment in the cereal category, particularly in the U.S. and UK, softer Eggo sales and the voluntary cereal recall,” said David Mackay, Kellogg CEO. “The second quarter performance was weaker than expected, and we have lowered our full-year guidance to reflect the cost of the recall and the difficult business environment. However, we are anticipating a stronger back half driven by increased innovation, reinvestment in our business, and gradual improvement in category trends.”
Kellogg North America posted a second quarter net sales decline of 5 percent on a reported basis and a 6 percent decline on an internal basis. The decline was primarily driven by 13 percent lower North America Retail Cereal internal net sales reflecting continued weakness in the cereal category, the impact of the voluntary cereal recall, and a reduction in customer inventories.
Strong performance in Pop-Tarts and the wholesome snacks categories contributed to Retail Snacks internal net sales growth of 1 percent. The North America Frozen and Specialty Channels businesses posted an internal net sales decline of 9 percent, as a result of softer Eggo sales as the company began to recover from a previous supply disruption.
North America operating profit declined 15 percent on a reported basis and 16 percent on an internal basis. The voluntary cereal recall adversely impacted North America operating profit by 13 percent.
Kellogg International posted a 5 percent decline in second quarter 2010 reported net sales. On an internal basis, excluding the effects of currency translation, net sales for Kellogg International were flat.
The company lowered its 2010 guidance for full-year earnings per share growth on a currency-neutral basis to the range of 8 to 10 percent. The company expects 2010 internal net sales growth to be in the flat to 1 percent range, and internal operating profit growth to be in the 4 to 6 percent range. Up-front costs for full-year 2010 are now expected to be approximately 12 cents per share compared with earlier estimates of 16 cents per share. Cash flow guidance was reduced to a range of $1.15 to $1.2 billion, in line with business results.