Kellogg ( K) reported a 5% drop in fourth-quarter earnings as higher costs offset sales growth. The cereal and snack giant posted earnings of $182.4 million, or 45 cents a share, down from $192.4 million, or 47 cents a share, a year earlier. Analysts polled by Thomson Financial predicted earnings of 46 cents a share. Sales climbed to $2.58 billion from $2.39 billion, edging past Wall Street's estimate of $2.53 billion. Profits were hurt, however, by a 70-basis-point decline in gross margins. The maker of Pop-Tarts, Eggo waffles and Keebler cookies said margins were hurt by higher fuel, energy, commodity and benefit costs. The company also recorded 3 cents a share related to stock-option costs and had business investment costs of 8 cents a share, which Kellogg said was significantly greater than the year-earlier quarter. Despite the higher costs, Kellogg now expects 2007 earnings of $2.68 to $2.73 a share, a penny higher than its prior forecast of $2.67 to $2.72 a share. The company expects full-year sales growth could be 4%, slightly greater than its long-term targets. Analysts expect full-year earnings of $2.75 a share and sales of $11.34 billion.