Kellogg Company (K - Analyst Report) reported dismal fourth-quarter results which missed the Zacks Consensus Estimate for both earnings and sales as it battles with declining demand for cereals.

The world’s largest cereal maker lowered its long-term sales target which led to more than 5% decline in the share price in pre-market trading.

Earnings Decline

Fourth-quarter adjusted earnings of 84 cents per share missed the Zacks Consensus Estimate of 92 cents by almost 9%. Earnings declined 1.2% year over year due to weak revenues and higher brand building investments. Adjusted earnings includes a 2 cent headwind from currency volatility.

Adjusted earnings exclude integration costs, differences in the number of shipping days, costs associated with Project K restructuring program and a mark-to-market loss. Including these items, reported loss was 82 cents per share as against earnings of $2.24 a year ago.

Kellogg Company - Earnings Surprise | FindTheBest

Revenues & Margins Weak

Kellogg’s reported revenues of $3.51 billion went up 0.3% year over year only due to 5.6% benefit from the difference in shipping days in the quarter.

Currency hurt sales by 2.9%, while acquisitions and dispositions had a negligible impact on the results. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions, foreign exchange and difference in shipping days) declined 2.2%. Revenues also missed the Zacks Consensus Estimate of $3.65 billion by 3.8%.

Continued weak sales in the U.S. and slowdown in Europe and Asia Pacific due to significant currency headwinds hurt the top line.

While volumes declined 2.3%, price/mix added 0.1% to sales.

Kellogg’s adjusted operating profit was almost flat at $462 million due to lower sales and higher brand building investments. Profits remained weak in the U.S., while it improved in Europe and Asia Pacific.

Segment Discussion

North America: Kellogg’s North America sales increased 2.3% year over year to $2.30 billion gaining from the difference in shipping days. However, organically, sales decreased 3.9% hurt once again by decline in cereals and snacks sales. Price/mix declined 0.4% and volumes decreased 3.5%.

Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, declined 7.7% due to weak demand.

Kellogg’s U.S. cereal business, accounting for 40–45% of sales, has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives such as yogurt, eggs, bread and peanut butter are hurting category growth.

Moreover, changing consumer views on health and wellness and shift in consumer attitude from reduced calories to weight and wellness is hurting sales of Kellogg’s low-calorie cereals, like Special K. Though the company is trying to reinvigorate this segment through innovation and aggressive marketing campaigns, these activities are yet to show results.

The U.S. Snacks businesses declined 3.1%. The U.S. Specialty Channels business declined 1% organically, while the North America Other business grew 1.3%.

Adjusted operating profit declined 6.5% due to weak sales.

International: During the quarter, revenues in Europe declined 1.2% organically to $681 million. Asia Pacific declined 1.2% organically to $243 million. Latin America, however, improved 7.2% to $287 million.

Adjusted operating profit improved 23.9% in Europe and 49.5% in Asia Pacific while declining 4% in Latin America.

Lags 2014 Sales and Earnings

In fiscal 2014, revenues declined 1.4% to $14.58 billion and missed the Zacks Consensus Estimate of $14.70 billion. Organically, sales increased 2% at the higher end of management’s expected range of decline between 1% and 2%.

Adjusted earnings were $3.81 per share, which beat the Zacks Consensus Estimate of $3.90 by 2.3%. Adjusted earnings declined 1% year over year and came in at the lower end of management’s expectation of $3.81–$3.89.

Lowers Long-Term Sales Guidance

Management lowered its long-term organic sales growth guidance range from 3–4% to 1–3% due to weak sales trends observed for the past two years.

However, it continues to expect mid single-digit (4% to 6%) improvement in adjusted operating profit and high single-digit (7% to 9%) growth in adjusted earnings per share (constant currency).

2015 Guidance Below Long-Term Targets

In 2015, organic revenue growth is expected to remain flat. The sales guidance excludes the impact of currency as well as an extra week in 2014.

Also, adjusted operating profit is expected to decline between 2% and 4%. Adjusted earnings per share (excluding currency headwinds) are expected in the range of negative 2% to flat.

Both operating profit and earnings per share guidance, however, include a negative impact of 3 to 4 percentage points from changes in its incentive-based compensation plan for 2015.

The organic sales, adjusted operating profit as well as earnings per share guidance for 2015 were far below the long-term targets. We believe it is difficult for the company to achieve growth in 2015 given the combination of weak sales trends and reinvestments in the business.

Stocks to Consider

Kellogg currently carries a Zacks Rank #4 (Sell). A better-ranked food stock is SUPERVALU, Inc. (SVU - Analyst Report) sporting a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the broader consumer staples sector include Dr Pepper Snapple, Group, Inc. (DPS - Analyst Report) and The Clorox Co. (CLX -Analyst Report), both carrying a Zacks Rank #2 (Buy)