Kellogg Earnings Miss Mark Due to Eggo Shortage

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Beset by disruptions in the production of its popular Eggo frozen waffles, which led to large-scale shortages at supermarkets in the fourth quarter, breakfast food maker Kellogg (K) saw its profit decline and couldn't meet Wall Street's expectations.Kellogg's fourth-quarter profit fell 1.7% to $176 million, or 46 cents per share, below analysts' expectations of 48 cents a share. The Battle Creek, Mich.-based company also saw sales decline 1.1% to $2.9 billion. In early afternoon, its stock was down 4% to $53.

In September, Kellogg had to temporarily shut down a plant in Atlanta that manufactured Eggo frozen waffles after a massive storm led to flooding. Unfortunately, the storm took place right around the time when other production lines in Tennessee were also closed down for repairs.

"A combination of a flood and extensive enhancement and repairs at Eggo facilities significantly impacted production in the second half of the year," said John Bryant, Kellogg's chief operating officer, in a conference call to discuss earnings. "While all of our plants are operational, we have not been able to achieve previous capacity levels so demand continues to exceed supply," he said.

The company expects to resolve the issue by mid-2010.

With the slowdown in the economy, Kellogg has also seen a decline in its food service business, which supplies breakfast items on-the-go to cafeterias, college and university campuses, and to the U.S. military.

"The negative trends in the food service industry and Eggo supply disruptions contributed to a 13% decline in the quarter," said Bryant.

The quarterly results would have been even more dire if Kellogg hadn't decided to increase its advertising in the second half of the year. Executives believe the increased advertising was the primary reason why consumers stayed true to Kellogg-branded cereals, despite a challenging economic environment in which many consumers have shifted to cheaper generic and store brands. Kellogg's market share in cereals grew 20 to 40 basis points in the fourth quarter as it increased its advertising spending by 15%.

The focus on healthier foods also continues to drive growth at Kellogg. Kashi Go Lean Crisp and Bear Naked granolas were among its higher performing cereals, while its best performing category within snacks was "wholesome snacks," such as Fiber Plus, which grew at a double-digit rate for the year.
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