(K) Kellogg Earnings Report Exceeds – Affirms Outlook

Kellogg Company (K) has posted fourth-quarter 2011 earnings of 64 cents per share, beating the Zacks Consensus Estimate by a penny. The earnings also exceeded the prior-year earnings of 51 cents per share by 25%. In fiscal 2011, earnings of $3.38 per share also surpassed both the Zacks Consensus Estimate by one cent and the prior-year estimate by 8 cents per share, respectively.

Kellogg’s results were driven by strong revenue growth and increased focus on investment in brand building and stronger innovation.

Quarter in Detail

Total net sales in the quarter jumped 5.4% to $3.02 billion, which exceeded the Zacks Consensus Estimate of $2.99 billion and the prior-year quarter sales of $2.86 billion. Operating profit improved 20.3% to $397 million. Excluding foreign currency translation, sales rose by 6% and operating profit grew 20.5%.

Net sales in fiscal 2011 jumped 6.5% to $13.20 billion, which exceeded the Zacks Consensus Estimate of $13.17 billion and the prior-year quarter sales of $12.40 billion. Operating profit, however, declined 0.7% to $2.0 billion. Excluding foreign currency translation, sales rose by 4.5% and operating profit fell 2.9%.

The decline in operating profit was due to the company’s supply-chain initiatives, the reinstatement of incentive compensation costs, and continued high-levels of commodity inflation.

Kellogg North America sales increased 6.6% to $2.06 billion in the fourth quarter and 5.6% to $8.87 billion in fiscal 2011. Excluding the foreign currency translation, North America sales increased 6.7% in the fourth quarter and 5.3% in fiscal 2011. North America Retail Cereal posted internal net sales growth of 3.9% in 2011 and 1.5% in the fourth quarter.

North America Retail Snacks posted internal net sales growth of 4.7% in 2011 and a strong 8.1% growth rate in the fourth quarter. The North America Frozen and Specialty Channels businesses delivered strong internal revenue growth of 9.7% in 2011 and 13.5% in the fourth quarter.

Operating profit in the North American region increased 18%, both excluding and including foreign currency translation in the fourth quarter. In fiscal 2011, operating profit at North America declined by 0.8%, while operating profit declined by 1.2%, excluding foreign currency translation.

Kellogg International sales jumped 2.9% to $954 million in the fourth, while it increased 8.3% to $4.33 billion in fiscal 2011. Excluding foreign currency translation, sales grew 4.7% in the fourth quarter and 2.8% in fiscal 2011. Excluding foreign currency translation, the Latin American business generated sales growth of 10.3% in 2011 and 15.1% in the fourth quarter.

The Asia-Pacific business posted sales growth of 4.1% in the full year 2011 and 8.2% in the fourth quarter. However, net sales in the European business declined at a 0.7% rate in fiscal 2011 and by 1.3% in the fourth quarter.

Kellogg International’s operating profit increased by 32.3% in the fourth quarter and 4% in fiscal 2011. Excluding foreign currency translation, operating profit increased 33.1% in the fourth quarter, while it declined by 2.4% in fiscal 2011.

Kellogg’s interest expense was $55 million in the quarter, while it was $233 million in fiscal 2011. The effective tax rate was 32% in the fourth quarter, while it was 29% in full year 2011.

Capital Structure

The company ended the quarter with cash and cash equivalents of $460 million, total long-term debt of $5.04 billion and shareholders’ equity of $1.76 billion.

Kellogg’s free cash flow was slightly more than $1 billion at the end of 2011. Kellogg also repurchased approximately $800 million of shares during the year and has approximately $650 million under its $2.5 billion three-year share repurchases authorization.

Guidance

Following the earnings results, Kellogg reaffirmed its full-year 2012 internal net sales growth guidance to a range of 4% to 5%, above long-term annual targets, reflecting price/mix benefits and a strengthening innovation pipeline.

For 2012, Kellogg expects its operating profit to be unchanged or slightly greater than its long-term annual targets, as the company continues to invest in future.

Kellogg also expects its full-year 2012 guidance of currency-neutral earnings per share to grow 2% to 4% including a benefit from the three-year $2.5 billion share repurchase program and the impact of continued investments in supply chain, an update of the company’s SAP platform, and an increase in the level of investment in brand building.

Headquartered in Battle Creek, Michigan, Kellogg engages in manufacture and marketing of ready-to-eat cereal and convenience foods. General Mills, Inc. (GIS) and Ralcorp Holdings Inc. (RAH) are its competitors.

Currently, Kellogg holds a Zacks #4 Rank, translating into a short-term Sell rating. On a long-term basis, we maintain an Underperform recommendation on the stock.

GENL MILLS (GIS): Free Stock Analysis Report

KELLOGG CO (K): Free Stock Analysis Report

RALCORP HLD-NEW (RAH): Free Stock Analysis Report

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