Back to top

Analyst Blog

Zacks Equity Research

Kellogg Beats Earnings Estimates in Q2, Lags Rev


Trades from $3

After missing the Zacks Consensus Estimate for both earnings and revenues in the first quarter of 2013, Kellogg Co. (K - Free Report) managed to beat the earnings estimate this time but missed out on revenues.  

Second quarter adjusted earnings of $1.00 per share came ahead of the Zacks Consensus Estimate of 97 cents per share by 3.1%. The second-quarter earnings also increased 5.3% from the prior-year quarter figure of 95 cents per share due to higher operating profit.

Adjusted earnings exclude integration costs related to the Pringles acquisition and mark-to-market-adjustments. Including these charges reported earnings were 96 cents per share, up 6.7% year over year.

Kellogg had acquired the Pringles snack business from Procter & Gamble Co. (PG - Free Report) in June last year. With the Pringles deal, Kellogg transformed itself from what was essentially a large U.S. snacks business to a true global snacks player.

Revenues & Margins

The world’s largest cereal maker reported revenues of $3.71 billion in the quarter, up 6.9% year over year, helped mainly by the Pringles acquisition. Revenues however missed the Zacks Consensus Estimate of $3.85 billion.

Volumes were down 0.1% while price/mix added 0.9% to sales growth. Volumes were considerably lower than the last quarter. Acquisitions added 9.5% to top-line growth (mainly due to Pringles) while dispositions pulled it down by 0.1%.

Currency had a negative impact of 0.6%. Accordingly, organic revenues (excluding impact of acquisitions, dispositions and foreign exchange) declined 0.5% mainly due to a sluggish US market.

Kellogg’s adjusted operating profit grew 7.8% due to lower costs of input.

Segment Discussion

North America: Kellogg North America’s sales increased 3.3% from the prior-year quarter to $2.4 billion in the second quarter, helped mainly by the Pringles business. Organically, segment sales decreased 1.6%, down from an increase of 1.7% recorded in the first quarter, hurt by choppy sales in cereals and snacks.

Organically, U.S. Morning Foods declined 3.3%. The U.S. snacks business declined 3.2%. U.S. Specialty was up 1.9%. The North America Other segment (includes U.S. Frozen and Canada businesses) was up 3.9% buoyed by the strong Frozen Food business.

Price/mix added 0.3% to revenue growth, while volumes declined 1.9%. Volumes were less than last quarter’s growth of 1.2%.

Internal operating profit grew 3.2% due to lower commodity costs.

International: Revenues in Europe declined 0.3% organically due to a tough operating environment. Asia Pacific grew 4.1% organically, much higher than 0.3% increase recorded in the last quarter owing to improved performance in Australia and strong double-digit growth in both South East Asia and India. Latin America grew 5.0% in the quarter.

Adjusted operating profit declined 8.3% in Latin America but grew 11.3% in Asia Pacific and 1.8% in Europe.

2013 Guidance Maintained

Kellogg maintained its previously provided outlook for 2013 on a currency-neutral basis. On a currency-neutral basis, adjusted earnings are expected to be $3.84 to $3.93 per share. This excludes integration costs and the impact of mark-to-market accounting.

The previous guidance was $3.82 to $3.91 that included $0.02 of negative impact from currency translation. The company continues to expect Pringles’ integration costs in the range of 12 cents--14 cents per share.

Reported earnings per share are guided to be down as it includes 9 cents of adverse currency translation versus 2 cents guided earlier. Reported sales growth is now expected to be around 5%, in line with the lower end of the range of 5%--7% guided previously. The slower-than-expected growth in developed markets, especially in the U.S., and the negative impact of currency translation compelled Kellogg to squeeze its guidance.

The company intends to generate around $1.1 to 1.2 billion in cash flow.

Kellogg carries a Zacks Rank #4 (Sell). However, some other food companies that are worth a look at the current level are The J. M. Smucker Co. (SJM - Free Report) and Treehouse Foods Inc. (THS - Free Report) both carrying a Zacks Rank #2 (Buy).