The world's largest ready-to-eat-cereal maker, Kellogg (NYSE: K), recently posted disappointing third-quarter results. Over the past few months, the company has been hurt by rising costs and food-safety issues. The company is currently hiring employees to undo its mistake of cutting jobs, resulting in a loss of investor confidence and consumer satisfaction. And to add to the misery, Kellogg has trimmed its full-year earnings outlook.
Is there light at the end of the tunnel?
A glance at the quarter
International markets could offer some hope. General Mills (NYSE: GIS) sells its products in almost 130 countries and generates a third of its revenue from international sources, while Kraft Foods (NYSE: KFT) sees 21% of its revenues from emerging markets. The maker of brands such as Corn Flakes and Rice Krispies, Kellogg also saw a slight rise in revenue over last quarter to $3.31 billion, benefited by strong international sales despite bad performance in Europe.
Kellogg's investments in its supply chain brought down net income by 14% compared to the previous year. Earnings per share of $0.80 didn't meet analysts' predictions of $0.89 per share.
Quality comes first
Earlier this year, U.S. regulators found listeria bacteria at a Kellogg plant in Georgia. Separately, the company had to recall nearly 28 million boxes of cereal and Keebler cookies after consumer complaints of an unusual smell.
The embarrassing recalls, safety concerns, and inventory shortages have made Kellogg extremely conscious of its quality-control measures. The company is focusing on rebuilding itself. It's strategically spending on replacing equipment, expanding capacity, and training employees. Following that, the company plans to strategically spend on advertisement and promotion of various brands to build consumer interest.
These investments have affected the bottom line of the company. Increasing costs and supply-chain investments pulled down gross margin to 40.8% from 43.4% last year. And, it'll continue to do so for a while now as Kellogg sees the infrastructure remodeling as a multiyear program to "drive reliability."
Foolish final thought
Kellogg's strategic spending on supply chain and advertisement might act as possible remedies to bring the company back into shape. The company has to prove its resilience in a challenging market, which won't happen overnight. But considering that Kellogg has the potential to get back on track sooner or later, I see this drop in stock price as a buying opportunity.
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