Kellogg Company (K - Analyst Report) reported better-than-expected earnings and profits in the third quarter of 2014. However, sales continued to decline as cereal sales in developed markets remained challenging.

Third-quarter adjusted earnings of 94 cents per share beat the Zacks Consensus Estimate of 93 cents by a penny. Earnings declined 3.1% year over year due to weak revenues. However, the earnings decline was better than management’s expectation of a mid single-digit decrease.

Adjusted earnings exclude integration costs related to the Jun 2012 Pringles acquisition, costs associated with Project K restructuring program and a mark-to-market loss. Including these items, reported earnings were 62 cents per share, down 31% year over year.

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Revenues & Margins Weak

The world’s largest cereal maker reported revenues of $3.64 billion in the quarter, down 2.1% year over year. Revenues missed the Zacks Consensus Estimate of $3.70 billion.

While volumes declined 1.9%, price/mix added 0.2% to sales. Currency hurt sales by 0.4%, while acquisitions and dispositions had a neutral impact on the quarterly results. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) declined 1.7% due to another quarter of soft sales in the U.S.

However, the international business did well in the quarterdue to decent sales and profit rebound in Asia Pacific which partially offset a slowdown in Europe.

Kellogg’s adjusted operating profit declined 1.8% to $531 million due to lower sales. Profits remained weak in the U.S., while it improved in Latin America and Asia Pacific.

Segment Discussion

North America: Kellogg North America sales decreased 4.2% (down 3.9% organically) from the prior-year quarter to $2.33 billion hurt by sales decline in all the segments, mainly cereals and snacks. Price/mix declined 1.6%, while volumes decreased 2.3%.

Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, declined 4.7% in the quarter 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 cereal category growth.

Moreover, changing consumer views on health and wellness and shift in consumer attitude from reduced calories to weight and wellness has hurt 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 4.2%. The U.S. Specialty Channels business declined 4.1% organically and the North America Other business went down 1.1%.

Adjusted operating profit declined 9.1% in the quarter due to weak sales.

International

During the quarter, revenues in Europe declined 0.6% organically to $726 million. Asia Pacific improved 5% organically to $264 million. Latin America improved 7.3% to $320 million.

Adjusted operating profit improved 3.8% in Europe, 19.8% in Latin America and 5.3% in Asia Pacific.

2014 Guidance Maintained

In 2014, organic revenues are expected to decline between 1% and 2%. The sales guidance excludes the impact of currency as well as an extra week in the year.

Also, adjusted operating profit is expected to decline between 1% and 3%.

Adjusted earnings per share (excluding currency headwinds) are still expected in the range of $3.81–$3.89, representing negative 1% to positive 1% growth rate.

The adjusted operating profit and earnings guidance exclude the impact of market adjustments, costs related to Project K and the expected benefit from an extra week in 2014. The 53rd week is expected to add 7 cents to earnings for the year.

However, currency is now expected to have no impact on earnings against prior expectation of a benefit of 3 cents per share. Including the 53rd week benefit and currency tailwinds, adjusted earnings per share are expected to range within $3.88–$3.96 lower than $3.91 to $3.99 expected previously.

The organic sales, adjusted operating profit as well as earnings per share guidance are far below the long-term targets — suggesting that 2014 could prove to be worse than 2013. We believe it is difficult for the company to achieve growth this year and possibly even in 2015 given the combination of weak sales trends and reinvestments in the business.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). Better-ranked food stocks include ConAgra Foods, Inc.(CAG - Analyst Report), Post Holdings, Inc. (POST -Snapshot Report) and McCormick & Company, Inc. (MKC - Analyst Report).While Post Holdings sports a Zacks Rank #1 (Strong Buy), ConAgra and McCormick have a Zacks Rank #2 (Buy).