(Reuters) - Kellogg Co (K.N) reported lower-than-expected quarterly profit margins on Thursday as the cereal maker spent more on marketing and transportation and had to cut prices on snack foods after it stopped distributing them directly to U.S. retailers.
Kellogg's Corn Flakes cereal is pictured at a Ralphs grocery store in Pasadena, California August 3, 2015. REUTERS/Mario Anzuoni/File Photo
The Battle Creek, Michigan-based company switched to its more widely used warehouse model last year to reduce expenses at its U.S. snacks business. But delivering its Pringles and Special K cereal bars directly to stores meant that it could charge retailers higher prices.
Second-quarter adjusted gross margin fell to 35.7 percent, below the 37.6 percent analysts expected, according to Thomson Reuters I/B/E/S. Margins were also hurt by higher transportation costs that have been plaguing Kellogg and other packaged goods companies all year.
Kellogg shares fell as much as 3.8 percent, weighed by margin concerns even after the Corn Flakes maker topped Wall Street’s net sales estimates for the fifth straight quarter and raised its full-year sales and profit outlook.
“Kellogg’s profit margins are below peers, which leads us to believe there is significant room for improvement,” Edward Jones analyst Brittany Weissman said, adding that the market had expected more from Kellogg going into the quarter.
First-half organic sales growth was pulled down by about 2 percentage points because of last year’s direct store delivery exit, Chief Financial Officer Fareed Khan told analysts on a post-earnings call. That drag should lessen through the third quarter because the warehouse model will have been in place for a full year, he said.
Kellogg, struggling with shifting trends as more people opt for low-sugar options, protein bars and yogurt for breakfast over cereals, has been buying
