Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
It may have been a win for consumers, but cereal maker Post Holdings (NYSE: POST ) lost out when its second-quarter earnings got milled by falling prices on top of higher costs.
The owner of brands such as Raisin Bran and Honey Bunches of Oats saw profits tumble almost 60% to $5.1 million as net sales fell 1% on a 4% decline in prices even though volumes rose. The price declines were driven primarily by trade spending, which accounted for 60% of the drop, and the rest was due to product mix. Trade spending is a marketing expense paid to retailers like supermarkets to promote the sale of a product through displays in the store. It's one of the reasons smaller cereal companies have a tough time breaking through the barrier and selling their products.
For Post, trade spending for the quarter included higher slotting fees for its new product introductions. Margins can rise or fall depending on how much trade spending is done. In 2011 margins were significantly helped because of a dramatic 18% decline in such spending.
It's an industrywide cost that can account for large portions of net sales, and it continues to consume a large portion of sales. For example, trade promotions by Kellogg (NYSE: K ) represented 40% of the company's net sales in 2012. General Mills (NYSE: GIS ) doesn't break out the expense, but when it acquired Yoplait last year, it admitted it would be increasing its marketing on top of an already elevated promotional budget due to greater trade spending.
Boston Consulting Group has found that consumer products manufacturers spend upward of $60 billion annually in the U.S., and that trade spending outpaced the growth of revenues by 3% between 2008 and 2010.
Post's results were also affected by higher interest expenses as a result of last year's spinoff from Ralcorp, which ended up getting acquired by ConAgra (NYSE: CAG ) earlier this year. It carries a load of debt due to breaking away from its former parent, and last October the cereal maker issued $250 million in senior notes, sending interest expense this quarter up to $21.6 million, up 43% from the $15.1 million expense recorded a year ago.
With breakfast cereals a highly competitive niche, grappling for every advantage is a common practice for the industry, but it's a competitive one. Post Holdings' stock, which has gained more than 30% so far this year, just posted a near 6% decline yesterday on those earnings numbers. With the stock still trading at nearly 26 times earnings estimates, it may be easier for investors to swallow Kellogg or General Mills, which sit at 16 and 17 times estimates, respectively.
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.