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Subject:  Keebler Scraps for Crumbs Date:  5/18/2000  4:50 PM
Author:  TMFSpirit Number:  31 of 33

Good evening,

For the Motley Fool World news today TMF Tardior wrote an article about Keebler. We hope you enjoy it.

Keebler Scraps for Crumbs

By Brian Lund (TMF Tardior) May 18, 2000

Say you're a company founded in 1853 that makes cookies and crackers -- a mature industry with lots of competition. You've got some solid brands, but they have been around so long that it's hard to boost sales. Even heavy advertising can only hope to bring single-digit revenue growth. What do you do?

If you're Keebler Foods (NYSE: KBL) , the second-biggest cookie and cracker manufacturer in the U.S. after Nabisco Holdings Group (NYSE: NA) , you throw the kitchen sink at the problem. Keep up strong marketing, while acquiring new businesses and implementing cost-efficiency measures. It's the only way, really. There have to be continual improvements across the board in order to sustain even moderate growth.

Keebler reported its earnings for the first quarter this morning. Net sales grew to $856 million, up ever so slightly from $852 million a year ago. Discounting divested and newly acquired businesses, sales actually fell 1% to $846.1 million, in spite of a 0.3 market share point gain in dollar sales. That result was about 5% lower than analysts expected. Thanks to drops in cost of goods sold (COGS) and sales, general, and administrative (SG&A) costs, Keebler's operating margins improved to 10.9%, 2.6 percentage points over the year-ago quarter.

These efficiencies, combined with a drop in the tax rate from 43% to 41% through better tax planning, brought a quite substantial bump to the bottom line. Net income hit $47.5 million, or $0.55 per share, 45% ahead of last year's first quarter and a full 10 cents above analysts' estimates as reported by First Call.

It's nice to see those kind of improvements. Margins have risen steadily at Keebler for the last two years. Operating margins were up four percentage points in 1999 over 1997's levels, and net margins rose three percentage points to 5.8% over those two years. This allowed the company to translate a 20% increase in sales last year into a 63% boost in net income from continuing operations.

The trouble is that most of that sales growth came from the September 1998 acquisition of President's Baking, maker of Famous Amos and Murray's Sugar-Free cookies. That acquisition lifted sales 15.7%. Comparable sales volume grew only 2.8%, and the remaining 1.2% growth came from price increases.

This quarter, Keebler's branded products experienced flat sales, while sales in its specialty segment sold under other brands and guises (including Girl Scout Cookies) actually declined slightly. That's not good news for your core business. A company can realize only so much growth from efficient production. Eventually, growth has to come from within.

Or does it? If the business can kick off enough free cash flow to fund acquisitions, sales growth can continue without core improvements. This is largely how Berkshire Hathaway (NYSE: BRK.A) has managed to increase its sales and service revenues over the last five years. Keebler, however, is not Berkshire Hathaway. It doesn't have other businesses to support it in a pinch. It does, however, produce fairly decent free cash flow, which may sustain growth through acquisition, though it will not leave much for shareholders.

Keebler has a plan for growth and it is executing on that plan. I'm just not sure that its growth will ever be anything but elfin.

Related Links:
* Keebler website (Warning: Be ready for perky tree house music)
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