Earnings Preview: Kellogg Could Beat Street Despite Snafus
Kellogg (K), the world's largest breakfast cereal company, has hit a rough patch lately.Not only has the recession led to a drop in consumer spending, but Kellogg has also had to deal with production issues and changes at one of its largest customers, Wal-Mart.
Kellogg will report its fourth-quarter earnings on Thursday morning, and analysts polled by Thomson Reuters expect it to say it earned 48 cents a share on revenue of $2.94 billion.
In recent months, disruptions in production at two large plants led to a shortage of the company's popular Eggo frozen waffles. Kellogg had to shut down a plant in Atlanta for an undisclosed period after a massive September storm led to flooding, and other production lines in Tennessee were also closed for repairs. The company expects to resolve those issues by mid-2010. "[It's] proven disruptive to its supply chain. Out-of-stocks have become prevalent across retailers," said Terry Bivens, an analyst at JP Morgan.
Kellogg is also being hurt by Wal-Mart's decision to present a cleaner look at its stores by reducing the number of product displays in certain areas that are highly frequented by customers. "The net effect is you open up the customer space, you improve the shopping experience, you provide access and visibility to departments in the store," explained Bill Simon, Wal-Mart's chief operating officer, at a recent analysts' presentation.
Already, that's affecting some Kellogg brands like Pop-Tarts, according to analysts. Kellogg's cereals, breakfast foods and snacks have always done well at Wal-Mart because they were prominently displayed.
"Cereal growth at Walmart has historically outpaced grocers, and Kellogg has been a chief [beneficiary]. Growth, however, now lags at Walmart, and the underperformance is more pronounced for Kellogg," said Bivens of JP Morgan in a report.
Still, despite all these issues, the company could still surprise on the upside, because it's noted that consumers are buying more of its products in response to increased advertising.
Kellogg CEO David Mackay has said the company is taking advantage of lower prices for advertising during the economic downturn. "We believe that while the current economic environment is challenging, it also gives us the opportunity to build an even stronger Kellogg Company for the future," told analysts after releasing third-quarter earnings.
During the third quarter, Kellogg's advertising spending increased 17% year-over-year. Mackay said that he expected advertising to continue to increase at a strong double-digit rate for the rest of the fiscal year.