What happened

Shares of Kellogg Company (NYSE:K) stock dropped 5% in early trading Thursday, despite the cereals giant reporting revenues that broadly met expectations and earnings that beat expectations for its fiscal first quarter 2019. As of 2:15 p.m. EDT, Kellogg's decline had moderated to about 3.1%.

Sales met expectations at just over $3.5 billion for the quarter and were up 3.5% year over year. Expected to earn $0.95 per share (pro forma) for the quarter, Kellogg reported that it earned $1.01 per share.

Supermarket cereal aisle.

Image source: Getty Images.

So what

That's the good news. The bad news is that, as calculated according to generally accepted accounting principles (GAAP), Kellogg's GAAP earnings were only $0.82 per share and were thus down 35% in comparison to last year's Q1. (Pro forma profits declined 18% -- still not a great result.)

Kellogg management cited "steadily improving consumption trends across many key markets, categories and brands" for its sales growth but noted that "as expected, higher input costs and effective tax rate contributed to lower earnings."

Of the two, input costs were the more significant factor depressing results. Kellogg's cost of goods sold surged 12% year over year to $2.4 billion, far outpacing sales growth. Taxes climbed only 7%, to $72 million.

Now what

As announced in April, Kellogg plans to sell off "selected cookies, fruit snacks, pie crusts, and ice-cream cones" in a deal expected to close in late July. Management updated its guidance to incorporate the likely effect of these divestitures:

  • Sales growth will be cut by 2% to 3% this year, reducing total company sales growth to perhaps 1% or 2%.
  • Operating profits will decline by an additional 4% to 5%, resulting in a total decline in companywide earnings of perhaps 10% to 11% before accounting for foreign exchange rates.

For context, analysts had been expecting to see earnings decline only about 8% this year, to $3.97 per share. Thus, it seems likely the new, lower guidance is in part to blame for Kellogg's sell-off today.

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