Kellogg Co.’s 2nd-quarter profit falls 15 percent on cereal recall, lowers outlook

Costs for recall hit Kellogg in 2Q, cuts outlook

PORTLAND, Ore. — A major cereal recall and soft sales dragged Kellogg Co.’s second-quarter net income down 15 percent and led the food maker to cut its full-year outlook Thursday.

The results were below Wall Street’s expectations and the company’s shares fell sharply in trading.

Kellogg, which makes products such as Pop Tarts, Frosted Flakes and Cheez-Its, said the results were disappointing. The company reported that it earned $302 million, or 79 cents per share for the quarter, down from $354 million, or 92 cents per share in the prior year. Revenue fell 5 percent to $3.06 billion.

That’s well below the 94 cents per share on revenue of $3.29 billion that analysts expected, according to a Thomson Reuters poll.

Kellogg recalled 28 million boxes of Apple Jacks, Corn Pops, Froot Loops and Honey Smacks cereal last month after about 20 people complained that the boxes had an unusual smell and flavor, which the company blamed on a chemical in the boxes’ liners.

The company later identified elevated levels of chemicals in the liner as the cause and said Thursday that it was a supplier issue. The recall cut into Kellogg’s revenue and cut profit by 10 cents per share for the quarter. The company expects it will continue to take its toll at an estimated 12 cents per share of profit for the full-year.

Kellogg also saw its cereal revenue hurt as the company limited the number of products it sells and faced a tough comparison to last year when cereal sales were on a major upswing. The company sold about the same amount of cereal for the quarter but struggled with increased promotions at retailers that cut prices and tougher competition from companies such as Ralcorp’s Post Brands.

Analysts said the quarter was disappointing for a company that typically delivers solid growth.

Janney Capital Markets analyst Jonathan Feeny said in a research note that the only factor Kellogg did not cite for declining cereal revenue is “aliens took away cereal in a UFO.” But he limited his concern, saying cereal has been a great category for a long time and that Kellogg would find a way to recover.

The company also reported that its frozen foods business suffered during the quarter as its Eggo business works to rebound from a series of production interruptions that led to shortages. Kellogg has since gotten supplies back up to normal but said some shoppers have yet to resume their normal buying patterns.

Kellogg’s CEO David Mackay said the second quarter is not indicative of the potential of the company, but said it is essential to face the issues that created this weakness. The company said it is working more diligently with suppliers to avoid future issues and is pursuing all possible legal opportunities with the supplier linked to the recall, which it would not name. The company also lowered its guidance to reflect the weak quarter.

Kellogg said it now expects earnings per share to grow between 8 percent and 10 percent. Earlier this spring, it forecast the figure would rise between 11 percent and 13 percent.

Kellogg also said it temporarily closed a plant at its headquarters in Battle Creek, Mich., on Tuesday due to a nearby oil spill on the Kalamazoo River, but the food maker said operations are now back to normal. The company said officials have assured them the air and water quality is safe.

Shares of the company, based in Battle Creek, Mich., fell $2.50 — nearly 5 percent — to $29.02 in midmorning trading.

AP Business Writer Ashely Heher contributed to this report from Chicago.