Are Consumer Companies Doomed?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Kellogg (NYSE: K  ) shareholders are likely battling sour stomachs after last week's earnings release, which not even a merry band of Keebler elves could couch in a positive light.

Second-quarter sales fell 5%, to $3.1 billion. Earnings per share fared worse, declining 14% -- or $0.13 -- to $0.79. A variety of factors contributed to the stale performance, including a product recall in the last several days of the quarter.

On June 25, Kellogg announced a voluntary recall of U.S.-shipped cereals, including Apple Jacks, Corn Pops, and Honey Smacks, owing to an "uncharacteristic off-flavor and smell" emanating from the package liner.

Management estimates that this snafu was responsible for $0.10 of the $0.13 EPS dip. Well, OK, manufacturing errors do happen. But we still need to account for the other three cents, plus the additional six cents or so that would've been necessary to produce mid-single-digit EPS growth -- the absolute bottom of what I'd consider to be a winning level.

And this is where things get really ugly. Kellogg cited deflationary forces in the U.S. and U.K. cereal category, a reduction in North American retailer inventories, and lower Eggo sales, the latter resulting from a production interruption in late 2009. It's those first two factors that really have me worried.

In North American Retail Cereal, a subsegment of the company's largest reporting division, sales fell by a currency-neutral 13%. Now, only an estimated 5% of that sales decline owed to the recall, with the balance coming from negatives such as retailer inventory pullback and lower consumer consumption. In other words, not only are consumers once again growing cautious, but retailers, too, appear to be stepping back into cash-conservation mode.

In fact, grocer SUPERVALU (NYSE: SVU  ) recently reported that its item-per-customer sales metric was down, while food stamp usage has risen to the "highest levels since we've been tracking it." Signs of deflation -- that dreaded D-word -- are popping up elsewhere in the consumer landscape. (Nasdaq: AMZN  ) has slashed prices on its Kindle e-reader at what The New York Times calls an "unusual" rate, pushing a price war with Barnes & Noble (NYSE: BKS  ) and Sony (NYSE: SNE  ) into overdrive.

I don't mean to spark a panic here, but for investors whose portfolios are heavily weighted toward U.S. consumer names, I'd digest Kellogg's results as reason for concern. Major concern.

Based on management's downward revised guidance of $3.41-$3.48 in 2010 EPS (excluding currency effects), Kellogg shares are trading at a current-year price-to-earnings ratio of roughly 14. That's below the five-year average and average low P/Es of 17.8 and 15.4, respectively. However, it's a notch above the current fiscal-year multiples of General Mills (NYSE: GIS  ) and J.M. Smucker (NYSE: SJM  ) , both of which I view as better equipped to outperform in an exceedingly tough consumer environment.

Until Tony the Tiger can prove his stripes, Kellogg shares are a hold. is a Motley Fool Stock Advisor pick. Kellogg is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1253000, ~/Articles/ArticleHandler.aspx, 10/28/2016 10:45:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,204.39 34.71 0.19%
S&P 500 2,138.46 5.42 0.25%
NASD 5,218.83 2.86 0.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 10:30 AM
AMZN $783.85 Down -34.51 -4.22% CAPS Rating: ****
BKS $10.45 Up +0.10 +0.97%
Barnes and Noble CAPS Rating: *
GIS $61.22 Up +0.50 +0.82%
General Mills CAPS Rating: ****
K $74.50 Up +0.34 +0.46%
Kellogg's CAPS Rating: ****
SJM $130.78 Up +1.50 +1.16%
J.M. Smucker CAPS Rating: *****
SNE $31.53 Down -0.01 -0.02%
Sony CAPS Rating: ***
SVU $4.35 Down -0.01 -0.23%
SuperValu CAPS Rating: **