UPDATE 4-Kellogg gives cautious forecast after profit falls

* Q3 EPS $0.90 in line with Wall Street expectations

* Affirms lowered 2010 forecast

* Sees EPS growth for 2011 below long-term target

* Shares down 2.1 percent; General Mills off 0.6 percent
(Adds CEO comment)

By Martinne Geller

NEW YORK, Nov 2 (BestGrowthStock) – Kellogg Co (K.N: ) forecast
weaker-than-expected earnings growth for 2011 as the cereal
maker recovers from a tough 2010 that was marred by a recall of
millions of boxes of its cereal.

The world’s largest cereal maker delivered the outlook on
Tuesday, the same day it reported third-quarter profit (Read more your timing to make a profit.) in line
with Wall Street’s expectations.

“We understand the issues that have taken us off-track this
year, we’re addressing those,” Chief Executive David Mackay
said in an interview.

He was referring to a lack of new products, industry
discounting and the recall of 28 million boxes of cereals like
Apple Jacks and Corn Pops after complaints of a waxy smell and
flavor in some boxes. [ID:nN25162877]

In addition to lost sales, Kellogg said the recall will
result in additional operating expenses in 2010 and 2011 and
higher capital spending in 2011 and 2012.

Kellogg said 2011 sales, excluding currency fluctuations,
likely would rise at a low single-digit percentage rate, in
line with its long-term target. It forecast 2011 earnings per
share to rise at a low single-digit rate, below its long-term
goal for high single-digit growth.

Mackay said the company is doing all it can to get its
business back on track from 2010, including launching new
products and investing in marketing, but cautioned that “it
will not be done overnight”.

“Our belief is that we’ll regain our momentum throughout
2011 and get back to our long-term targets as soon as
possible,” Mackay said — “hopefully” in 2012.

Barclays Capital analyst Andrew Lazar said the 2011 target
translated to earnings-per-share of roughly $3.40, which is
below analysts’ average estimate of $3.62 per share, according
to Thomson Reuters I/B/E/S.

The forecast does not depend on an economic recovery,
Mackay said, adding that consumers are still buying frugally.

“It’s very hard to predict the macroeconomic environment
for next year,” Mackay said. “We’re assuming it’ll be broadly
similar to 2010.”

Kellogg, which also makes Eggo waffles and Keebler cookies,
reported preliminary third-quarter results last month and cut
its 2010 outlook for the second time. [ID:nN21273800]

It affirmed that lower forecast on Tuesday.

Kellogg’s third-quarter net income fell to $338 million, or
90 cents per share, from $361 million, or 94 cents per share, a
year earlier. Sales fell to $3.16 billion from $3.28 billion.

North American sales fell 3 percent, with cereal sales to
retailers down 6 percent. Snack sales were roughly flat.
International sales fell 6 percent, or 2 percent excluding
adjustments for currency fluctuations.

Its shares were down 1.7 percent at $49.87 on the New York
Stock Exchange in afternoon trading, while rival General Mills
(GIS.N: ) was off 0.7 percent.

NEW PRODUCTS, HIGHER PRICES

The company expects its operating profit to be flat to down
2 percent in 2011 as it increases compensation.

“They’re clearly giving themselves flexibility to invest in
the business to get back to more consistent-paced earnings
growth,” said Edward Jones analyst Matt Arnold, adding that
Kellogg has a history of issuing conservative forecasts.

Higher costs for ingredients such as grains and sugar are
expected to inflate Kellogg’s costs by 6 percent next year. The
company expects to offset about 4 percentage points with cost
cuts, and the remainder with price increases.

Kellogg expects to see a 2 to 3 percentage point increase
in the average price of its products next year, fueled by lower
spending on promotions, price increases and selling a higher
proportion of higher-priced products.

After two years of not developing many new products for
North America, Kellogg is launching several new cereals in
2011, including Crunchy Nut and Special K Oats and Honey, which
it sells in Britain.
(Reporting by Martinne Geller; Editing by Lisa Von Ahn, Derek
Caney and Robert MacMillan)

UPDATE 4-Kellogg gives cautious forecast after profit falls