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Kellogg (K) Cuts View on Q3 Earnings Miss, Costs on the Rise
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Kellogg Company (K - Free Report) came out with third-quarter 2018 results, wherein both top and bottom lines improved year over year, and the former marked its sixth consecutive beat. While earnings gained from higher revenues and gains from tax reforms, revenues were backed by buyouts and organic sales growth.
However, the company marked its first earnings miss after two successive beats, and also lowered its earnings outlook on account of increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions.
Q3 in Detail
Adjusted earnings of $1.06 per share missed the Zacks Consensus Estimate by a penny. Nevertheless, the bottom line increased 2.9% year over year, supported by tax gains from the U.S. tax reforms, somewhat negated by increased interest costs associated with buyout-related debt. On a currency-neutral basis, adjusted earnings increased 3.9% to $1.07 per share.
Kellogg reported revenues of $3,469 billion, up 6.8% year over year. The upside can be primarily attributed to the takeover of RXBAR and consolidation of Multipro. The top line also outpaced the consensus mark of $3,417 million. On a constant-currency (cc) basis, sales during the quarter improved 9.3%.
Further, organic revenues climbed 0.4% on the back of impressive underlying growth even amid tough year-over-year comparisons in various businesses. Also, results were somewhat negatively impacted by unfavorable list-price adjustments and SKU rationalization in the company’s U.S. Snacks unit (associated with its conversion from Direct-Store-Delivery or DSD).
The company’s currency-neutral adjusted gross profit rose 1.2% to $1,257 million, while the respective margin contracted 290 basis points (bps) to 35.4%.
Kellogg’s adjusted operating profit fell 4% to $471 million, owing to planned increases in advertising and promotion investments along with elevated higher distribution expenses. Notably, the company is on track with its Project K restructuring program. Further, adjusted operating margin contracted 150 bps to 13.6%.
Segment Discussion
North America: Kellogg’s North America sales of $2,188 million rose 1.1% from the prior-year quarter’s level, mainly due to gains from RX’s buyout. Organic sales declined due to list-price adjustments and SKU rationalization in the company’s U.S. Snacks unit, stemming from last year’s conversion out of DSD. During the quarter, sales declined across the U.S. Snacks, U.S. Morning Foods and U.S. Specialty Channels categories. Also, adjusted operating profit declined on account of advertising and promotional investments, and other incremental costs.
Europe: The segment’s revenues of $596 million slipped 0.5% year on year, owing to unfavorable currency movements. On a currency-neutral basis, sales grew on the back of high snacks sales. Adjusted operating profit improved on a year-over-year basis.
Latin America: Revenues of $239 million in the segment improved 1.4% year on year, aided by growth witnessed across Mexico and Mercosur, partially offset by currency headwinds. Higher net sales also fueled adjusted operating profit growth.
Asia-Pacific: The segment’s revenues of $446 million improved substantially year over year on the back of strong growth in cereals and snacks as well as growth in the developed and emerging markets. The region also gained from the consolidation of Multipro. Adjusted operating profit witnessed a sharp improvement.
Other Financials
Kellogg ended the quarter with cash and cash equivalents of $309 million, long-term debt of $8,715 million and total equity of $3,615 million.
On a year-to-date basis, the company generated cash from operating activities of $926 million.
Outlook
Kellogg’s third-quarter performance was driven by both acquisition gains and organic sales growth. Further, the company witnessed enhanced consumption trends across core markets, brands and categories. The company is also on track to generate productivity savings, which are enabling it to counter cost pressures, mainly stemming from higher transport costs. Further, Kellogg continues to witness increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions.
Though these factors weighed on the company’s operating profit, Kellogg plans to continue with these investments as they bode well for future growth. This may entail escalated costs in the near term, while the company’s planned installation of an in-house packing facility may help it enhance margins over the medium term.
Kellogg now expects revenues to grow about 5% (at cc) compared with the previously guidance of 4-5%. The raised guidance reflects better net sales and consumption trends, while it continues to incorporate adverse impacts from the DSD transition at U.S. Snacks division.
However, adjusted operating profit growth (at cc) is now anticipated to remain roughly flat year over year compared with 5-7% growth forecasted earlier. Management expects higher investments, mix shifts and costs related to expansion of co-packed pack formats to dent fourth-quarter operating profit.
Consequently, the company trimmed its adjusted earnings growth view to 7-8% (at cc) from 11-13% projected earlier. This can be attributed to a decline in adjusted operating profit, somewhat made up by lower effective tax rate.
Price Performance
This Zacks Rank #3 (Hold) stock has gained 8.3% this year, against the industry’s decline of close to 10%.
McCormick & Company, Incorporated (MKC - Free Report) has long-term earnings per share growth rate of 9% and a Zacks Rank #2 (Buy).
Lamb Weston (LW - Free Report) , with a Zacks Rank #2, has long-term earnings per share growth rate of 11%.
3 Medical Stocks to Buy Now
The greatest discovery in this century of biology is now at the flashpoint between theory and realization. Billions of dollars in research have poured into it. Companies are already generating revenue, and cures for a variety of deadly diseases are in the pipeline.
So are big potential profits for early investors. Zacks has released an updated Special Report that explains this breakthrough and names the best 3 stocks to ride it.
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Kellogg (K) Cuts View on Q3 Earnings Miss, Costs on the Rise
Kellogg Company (K - Free Report) came out with third-quarter 2018 results, wherein both top and bottom lines improved year over year, and the former marked its sixth consecutive beat. While earnings gained from higher revenues and gains from tax reforms, revenues were backed by buyouts and organic sales growth.
However, the company marked its first earnings miss after two successive beats, and also lowered its earnings outlook on account of increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions.
Q3 in Detail
Adjusted earnings of $1.06 per share missed the Zacks Consensus Estimate by a penny. Nevertheless, the bottom line increased 2.9% year over year, supported by tax gains from the U.S. tax reforms, somewhat negated by increased interest costs associated with buyout-related debt. On a currency-neutral basis, adjusted earnings increased 3.9% to $1.07 per share.
Kellogg Company Price, Consensus and EPS Surprise
Kellogg Company Price, Consensus and EPS Surprise | Kellogg Company Quote
Kellogg reported revenues of $3,469 billion, up 6.8% year over year. The upside can be primarily attributed to the takeover of RXBAR and consolidation of Multipro. The top line also outpaced the consensus mark of $3,417 million. On a constant-currency (cc) basis, sales during the quarter improved 9.3%.
Further, organic revenues climbed 0.4% on the back of impressive underlying growth even amid tough year-over-year comparisons in various businesses. Also, results were somewhat negatively impacted by unfavorable list-price adjustments and SKU rationalization in the company’s U.S. Snacks unit (associated with its conversion from Direct-Store-Delivery or DSD).
The company’s currency-neutral adjusted gross profit rose 1.2% to $1,257 million, while the respective margin contracted 290 basis points (bps) to 35.4%.
Kellogg’s adjusted operating profit fell 4% to $471 million, owing to planned increases in advertising and promotion investments along with elevated higher distribution expenses. Notably, the company is on track with its Project K restructuring program. Further, adjusted operating margin contracted 150 bps to 13.6%.
Segment Discussion
North America: Kellogg’s North America sales of $2,188 million rose 1.1% from the prior-year quarter’s level, mainly due to gains from RX’s buyout. Organic sales declined due to list-price adjustments and SKU rationalization in the company’s U.S. Snacks unit, stemming from last year’s conversion out of DSD. During the quarter, sales declined across the U.S. Snacks, U.S. Morning Foods and U.S. Specialty Channels categories. Also, adjusted operating profit declined on account of advertising and promotional investments, and other incremental costs.
Europe: The segment’s revenues of $596 million slipped 0.5% year on year, owing to unfavorable currency movements. On a currency-neutral basis, sales grew on the back of high snacks sales. Adjusted operating profit improved on a year-over-year basis.
Latin America: Revenues of $239 million in the segment improved 1.4% year on year, aided by growth witnessed across Mexico and Mercosur, partially offset by currency headwinds. Higher net sales also fueled adjusted operating profit growth.
Asia-Pacific: The segment’s revenues of $446 million improved substantially year over year on the back of strong growth in cereals and snacks as well as growth in the developed and emerging markets. The region also gained from the consolidation of Multipro. Adjusted operating profit witnessed a sharp improvement.
Other Financials
Kellogg ended the quarter with cash and cash equivalents of $309 million, long-term debt of $8,715 million and total equity of $3,615 million.
On a year-to-date basis, the company generated cash from operating activities of $926 million.
Outlook
Kellogg’s third-quarter performance was driven by both acquisition gains and organic sales growth. Further, the company witnessed enhanced consumption trends across core markets, brands and categories. The company is also on track to generate productivity savings, which are enabling it to counter cost pressures, mainly stemming from higher transport costs. Further, Kellogg continues to witness increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions.
Though these factors weighed on the company’s operating profit, Kellogg plans to continue with these investments as they bode well for future growth. This may entail escalated costs in the near term, while the company’s planned installation of an in-house packing facility may help it enhance margins over the medium term.
Kellogg now expects revenues to grow about 5% (at cc) compared with the previously guidance of 4-5%. The raised guidance reflects better net sales and consumption trends, while it continues to incorporate adverse impacts from the DSD transition at U.S. Snacks division.
However, adjusted operating profit growth (at cc) is now anticipated to remain roughly flat year over year compared with 5-7% growth forecasted earlier. Management expects higher investments, mix shifts and costs related to expansion of co-packed pack formats to dent fourth-quarter operating profit.
Consequently, the company trimmed its adjusted earnings growth view to 7-8% (at cc) from 11-13% projected earlier. This can be attributed to a decline in adjusted operating profit, somewhat made up by lower effective tax rate.
Price Performance
This Zacks Rank #3 (Hold) stock has gained 8.3% this year, against the industry’s decline of close to 10%.
Greedy for Food Stocks? Check These
Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 19%, carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
McCormick & Company, Incorporated (MKC - Free Report) has long-term earnings per share growth rate of 9% and a Zacks Rank #2 (Buy).
Lamb Weston (LW - Free Report) , with a Zacks Rank #2, has long-term earnings per share growth rate of 11%.
3 Medical Stocks to Buy Now
The greatest discovery in this century of biology is now at the flashpoint between theory and realization. Billions of dollars in research have poured into it. Companies are already generating revenue, and cures for a variety of deadly diseases are in the pipeline.
So are big potential profits for early investors. Zacks has released an updated Special Report that explains this breakthrough and names the best 3 stocks to ride it.
See them today for free >>