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Kellogg Gains on Pandemic-Led Demand, Hurt by Cost Concerns

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Kellogg Company (K - Free Report) has built a robust niche in the packaged foods space, thanks to its impressive innovation, lucrative buyouts and other brand-enhancing endeavors. In fact, the company’s products have been seeing burgeoning demand amid the pandemic-led increased at-home consumption and pantry-loading trends. Solid sales in the retail channel are also helping Kellogg counter declines in food sold in the away-from-home network.

Such upsides fueled Kellogg’s organic sales in the second quarter of 2020, wherein both earnings and sales beat the Zacks Consensus Estimate and the bottom line surged year over year. However, results were somewhat negated by the adverse impacts of the divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cone businesses as well as currency headwinds. Also, escalated costs are concerning.  

Though the company expects some slowdown in the second half of 2020, management perked up its overall guidance for 2020, as part of its second-quarter earnings release. Adjusted operating profit is expected to decline almost 1% at cc now compared with a 4% drop projected earlier. Adjusted earnings per share are expected to drop roughly 1% at cc compared with a 3-4% decline estimated before. Incidentally, the Zacks Consensus Estimate for 2020 has climbed about 4% to $3.93 per share over the past 30 days. Let’s delve deeper.

Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company price-consensus-eps-surprise-chart | Kellogg Company Quote

Organic Sales Gain on Pandemic-led Demand

Kellogg has been benefiting from increased demand for packaged food products amid the coronavirus-led stockpiling. Such trends also helped the company retain its organic sales trend in second-quarter 2020, which moved up 9.2% to $3,569 million (on excluding currency and divestitures). Management stated that demand increase for packaged food owing to the pandemic-led higher at-home consumption prevailed for a longer-than-expected period. This, in turn, fueled the company’s sales in retail channels and helped it counter the declines in food sold in the away-from-home network. Notably, organic sales grew across regions, mostly due to elevated cereal sales that compensated for declines in snack sales. Apart from Kellogg, food stocks like B&G Foods (BGS - Free Report) , TreeHouse Foods (THS - Free Report) and General Mills (GIS - Free Report) are gaining from the rising demand trends amid the coronavirus pandemic. Meanwhile, Kellogg’s organic sales for 2020 are now estimated to grow around 5%, up from the previous guidance of 1-2% increase.

Buyouts & Other Factors Strengthen Brand

Kellogg has been benefiting from its lucrative buyouts. The company acquired protein bar maker, Chicago Bar Company, in 2017. Chicago Bar Company makes RXBAR, which is considered one of the fastest-growing nutrition bar brands in the United States. RX now forms part of Kellogg’s organic revenues. Additionally, the company’s Pringles buyout has been lucrative. Also, the consolidation of Multipro (completed in May 2018), a Nigerian food distributor, has been yielding results. Apart from this, Kellogg’s focus on augmenting portfolio by adding more products, innovation and marketing initiatives is a key positive. In this respect, the company significantly invests in digital media, consumer promotions and traditional advertising. Kellogg has also been enhancing its in-store capabilities by increasing the sales force of its struggling businesses.

Can Cost Woes be Countered?

Kellogg has been incurring elevated costs related to operations amid the pandemic, such as costs concerning safety, logistics, temporary labor and employee benefits. In the second quarter, incremental costs associated with coronavirus were more than $20 million. In its second-quarter earnings release, Kellogg said that it expects to sustain direct costs associated with sanitization, safety and labor. Also, the company pushed certain investments related to brands, supply chain and commercial plans to the second half of 2020. Though these aided performance in the second quarter, these are likely to put pressure on operating profits in the second half, especially the third quarter.

Nevertheless, this Zacks Rank #3 (Hold) company’s aforementioned drivers, together with its saving initiatives, should help it overcome these boulders and fuel growth. Shares of Kellogg have gained 8.4% in the past three months compared with the industry’s growth of 9.8%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Kellogg Company (K) - free report >>

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B&G Foods, Inc. (BGS) - free report >>