Why Kellogg Got Slammed Today

Kellogg (NYS: K) left a bad taste in shareholders' mouths after today's unusually large drop. The 7% dip is made all the more sour when contrasted against the Dow Jones (Index: ^DJI) 1.5% midday rise.

The company managed a disappointing triumvirate of missed earnings, reduced forecasts, and lower volume. Net income fell to $0.80 a share, well short of the $0.89 analysts expected. Unappetizing for sure.

A main contributor to the 14% slip in profits was increased spending -- but not the good kind. CEO John Bryant reiterated that Kellogg will continue to spend on quality-control and supply-chain improvements. That seems nice and forward-thinking, but it's really a reaction to some serious quality issues the company has faced lately. Some recent embarrassing missteps include:

  • Multiple instances of listeria found in its Georgia factories.
  • A recall because of foul-smelling plastic packaging.
  • An Eggo waffle shortage.

Coupled with these company-specific issues, margins have been pinched across the packaged-foods industry lately. Though commodity prices have recently dipped, particularly for wheat , Kellogg has shot some of its brands in the foot and probably won't be able to capitalize on improving margins in the same way that competitors General Mills (NYS: GIS) , B&G Foods (NYS: BGS) , and Kraft (NYS: KFT) will. These companies successfully passed higher costs on to consumers when times were tough and will probably be riding the gravy train of better margins as commodity costs ease and their untarnished brands capture higher prices.

Kellogg can't seem to catch a break, as its previous cost-cutting attempts slashed too many workers, and product quality dipped. Now the company has to overspend to build up consumer confidence and brand strength.

Unfortunately for investors, these measures are costly and can take a long time to materialize.

Add Kellogg to your watchlist to say savvy on any updates, and see whether this spending pays off going forward.

At the time this article was published Austin Smith owns no shares of the companies mentioned here.Motley Fool newsletter serviceshave recommended buying shares of Kellogg. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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