Kellogg (K +0.00%) released its earnings report yesterday, and investors ate it up, sending shares 2% higher on a generally strong trading day. The company's 3Q earnings were pulled in different directions by two big brands -- Pringles, and Frosted Mini-Wheats. But the end result was a strong report for the snack and cereal maker.
Earnings
The company booked $3.7 billion in revenue, narrowly beating expectations for $3.68 billion in sales. Earnings came in at $0.82 per share, also besting the $0.80 that Kellogg reported last year, which analysts had expected the company to match this time around.
Weighing heavily on this year's 3Q was Kellogg's voluntary recall of 2.8 million packages of Frosted Mini-Wheats, which subtracted $0.06 from earnings in the quarter. The company pulled the packages off the shelves due to possible contamination by metal mesh from a faulty manufacturing part. Thankfully, no injuries were reported.
But recalls like this are worth following closely, as they are a persistent risk across the industry. For example, General Mills (GIS +1.71%) saw its profit reduced in 2008 by $24 million, thanks to its own recall. And Procter & Gamble (PG 0.14%) took a hit to its pet care division last year on a recall of some pet food products. To fix problems like these -- or to head them off before they happen -- these manufacturers have had to keep up expensive investments in their supply chains.
On the positive side of the scorecard, Kellogg saw strong early contribution from its Pringles chips brand. Pringles, which the company snatched up from Procter & Gamble this year, booked 10% organic growth during the quarter, helping lift overall sales. But the product's margins are still lower than Kellogg's average, so it pulled profitability down a tad. The company plans to get Pringle's margins up over time, so it shouldn't be long before the brand is up to full speed.
Foolish takeaway
Kellogg's management is cautiously optimistic about the near future. The company reaffirmed full-year revenue guidance, but expects lower profit on the year than it had originally forecast. Beyond that, investors should keep an eye on cost inflation, which promises to keep weighing on earnings through 2013.
Still, with plenty of innovative cereals and snacks in the pipeline, Kellogg -- and its 3% dividend yield -- is looking as tasty as ever.
