Tony the Tiger -- or, rather, Kellogg (NYSE: K) -- gave us a peek at first-quarter results yesterday. At first glance, the carnivore seemed to be devouring his competition. But a peek under his stripes reveals that the tiger isn't quite as peppy as he seems.
Sales volume
Total sales growth of 9% looks strong for the Battle Creek, Mich.-based company. U.S. snack sales (cookies, crackers, etc.) were impressive, notching an 11% gain. Cereal posted a less sterling 4% gain, mostly coming from price increases and changes in product mix -- case volume for cereal was about flat. I don't argue with packaged-goods sales gains of any stripe, but volume increases excite me more.
International sales grew 12%, but the weak dollar accounted for more than half this gain. Currency-adjusted international sales were up 5%, strongest in Latin America and down slightly in the Asia Pacific region. All in all, chalk this up as a 7% rise in worldwide sales after the effects of fluctuations in the value of the dollar.
Operating profit
Below the sales line, the picture rapidly fades to middling results. Reported operating profit was up 6%, but with half the gain coming from that pesky currency effect, the remaining 3% growth doesn't strike me as a great leap forward.
The company continues to struggle with commodity cost inflation, particularly in corn and wheat (Rich Duprey covered this topic admirably last January). Cost of goods sold increased 11%, taking a major bite out of the sales increase. Kellogg was successful at controlling expenses (less than 6% growth), despite a double-digit jump in advertising spend.
The company did inch up its earnings guidance for 2007, to $2.70-$2.74 from $2.68-$2.73. This type of tiny bump smacks of window dressing to me.
These aren't easy times for the packaged-foods business, with retailers pushing private labels that continue to nip away at the major brands. That said, I was more impressed with General Mills' (NYSE: GIS) earnings report last month. Although Colgate-Palmolive (NYSE: CL) is in a different segment of the business, its earnings last week gleamed. Consumer-product giants Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) lift the covers later this week. Stay tuned.
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Colgate-Palmolive is a Motley Fool Inside Value recommendation. Unilever is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days.
Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles and doesn't own shares of any companies mentioned in this article. The Fool's disclosure policy goes snap, crackle, pop.
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