Back to top

Kellogg Beats Earnings Estimates in Q2, Lags Rev

Read MoreHide Full Article

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).

More from Zacks Analyst Blog

You May Like