Kellogg Co. (NYSE:K), the world's largest cereal maker, posted increased second quarter profit on a rise in revenue, as the company passed through higher commodity costs to consumers. In addition to product price increases, Kellogg's earnings improved on a comparative basis as last year's second quarter was marked by product recalls and lower sales. (To help you choose winner for your portfolio, check out How To Make A Winning Long-Term Stock Pick.)
TUTORIAL: Earnings Quality
Pricing Remains the Focus
Food producers have been roiled by rising commodity costs and have been passing these input costs along to consumers for months now. In the cereal space, Kellogg rival General Mills (NYSE:GIS) produced a tepid quarter recently. General Mills, like Kellogg, has raised product prices, but hasn't seen the benefits yet. General Mills also indicated the higher product prices wouldn't offset its higher input costs for the rest of this year.
Kellogg, however, was able to convert is price increases into bottom line results. Second quarter reported net income was nearly 14% higher, at $343 million, or 94 cents a share, compared to $302 million, or 79 cents a share in the year ago quarter. The company cited new product innovation and improved cereal sales. Revenue rose to $3.386 billion, an 11% increase from last year's quarter's sales of $3.062 billion.
The company readily admitted that the quarter's results beat the year ago quarter due to easier comparisons, but that's not to disparage the results. Kellogg's North American cereal sales on a internal basis, or currency neutral basis, were 13% higher. The snack division, led by its cracker sales, had a 3% sales increase. Kellogg's international sales grew 16% year over year, to $1.2 billion. International sales account for roughly a third of the revenue, North American sales the main two thirds. (To help you cope with the rising cost of food, see 22 Ways To Fight Rising Food Prices.)
Other Food Producers
How are some of the other food makers doing, especially in regard to the pricing issue? Candy maker the Hershey Company (NYSE:HSY) recently reported earnings with increased net income year over year for its second quarter. Sales volume and pricing both improved the results, with pricing adding 3 percentage points to Hershey's 7.5% sales increase. Hershey has been raising prices for some time now, due to its higher input costs for sugar and other candy ingredients. Soft drink giant Coca-Cola (NYSE:KO) is another in the sector which sailed through its recent quarter also, with additional revenue from its integration of Coca-Cola Enterprises (NYSE:CCE), while also managing to convert Coke's price increases onto the bottom line. A year ago, the input pricing issue had troubled Coke.
The Bottom Line
Simply because some of these companies such as Kellogg and others are managing to fight through the pricing issue doesn't mean that it has somehow been completely overcome, or that investors shouldn't be concerned. Sara Lee (NYSE:SLE), HJ Heinz (NYSE:HNZ), United Natural Foods (Nasdaq:UNFI), and even Kraft Foods (NYSE:KFT), have all struggled with pricing issues in the past year. Also, even though these pressures have recently moderated some, and some companies, such as Coca Cola, maintain the input cost pressures will be moderate in the next year, it still bears watching. Given the ongoing turmoil in Washington and the possibilities of a weak economy weakening further, consumers will be pressed into difficulty accepting further increases. Trading down, where possible, should become a first indicator that consumers are buckling.
That said, Kellogg and other food makers who've continued to produce worthwhile earnings results are managing through a difficult set of economic conditions well. Kellogg has reiterated in its outlook that it will continue to raise prices. The company expects full year net sales growth of 4 to 5%, with internal profit growth of flat to negative 2%. Implied currency neutral EPS for the full year would be $3.33 to $3.40, which would be low single digit growth. The cereal maker will have to fight through continued headwinds in the economy the second half of the year, but it's done a superb job thus far. (For a better understanding, read What Are A Stock's "Fundamentals"?)
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