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Can Rising Demand, Brand Strength Aid Kellogg Amid High Costs?
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Despite the pandemic-induced uncertainty in the market, several consumer staple firms are on safe grounds. These players are benefiting from increased demand stemming from elevated at-home consumption of food, beverages and other essentials as well as pantry loading trends due to social distancing. Kellogg Company (K - Free Report) appears to be one such stock that is gaining on such trends.
Even food companies like Conagra (CAG - Free Report) , General Mills (GIS - Free Report) and TreeHouse Foods (THS - Free Report) are gaining on burgeoning demand amid the pandemic. Coming back to Kellogg, the packaged food behemoth’s brand strength through innovation and acquisitions are acting as drivers. Such upsides will likely help Kellogg battle concerns related to escalated costs and softness in the food away-from-home channel. Let’s delve deeper.
Impact of COVID-19
Kellogg has been benefiting from increased demand for packaged food products amid the coronavirus-led stockpiling. Such trends have 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). Notably, organic sales rose across regions, mostly due to elevated cereal sales that compensated for declines in snacks sales.
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. Kellogg delivered net sales of $3,465 million, which surpassed the consensus mark of $3,277 million. Adverse impacts from divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cone businesses as well as currency headwinds were offset by robust organic sales growth in other businesses, resulting from pandemic-led increased buying.
While higher at-home consumption is driving Kellogg’s retail demand, the company’s foodservice business is under pressure due to declines in food sold in the away-from-home network. This was witnessed in the second quarter of 2020, wherein away-from-home business fell sharply, with major declines across vending, travel and lodging and restaurants. Away-from-home sales related to travel are likely to remain soft for a while. The company predicts away-from-home demand to take some time to recover, and emerging markets to be affected by the slowing economies.
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 nearly 1% at cc compared with a 3-4% decline estimated before. Organic sales in the ongoing year are now estimated to grow around 5%, up from the previous guidance of 1-2%.
Brand-Building Efforts, Cost Concerns
Markedly, Kellogg boasts a solid product portfolio and brand identity in both cereals and snacks categories. Its portfolio consists of strong brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats among many others. Kellogg is dedicated toward augmenting its portfolio through adding more products under existing brands, innovation and marketing initiatives. The company has been focused on investing in brand-building efforts. In this respect, it invests in digital media, consumer promotions and traditional advertising.
In fact, Kellogg has a considerable amount of planned investments related to brands, supply-chain and commercial plans in the second half of 2020, which may impact margins. Apart from this, Kellogg has been incurring elevated costs related to operations amid the pandemic, such as costs around 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 stated that it expects to sustain direct costs associated with sanitization, safety and labor.
Nevertheless, Kellogg is on track with its productivity-saving initiatives as well as Deploy for Growth strategy. These along with the other abovementioned upsides are likely to boost Kellogg’s growth. Shares of this Zacks Rank #3 (Hold) company have gained 3.1% in the past six months compared with the industry’s growth of 16.4%.
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Can Rising Demand, Brand Strength Aid Kellogg Amid High Costs?
Despite the pandemic-induced uncertainty in the market, several consumer staple firms are on safe grounds. These players are benefiting from increased demand stemming from elevated at-home consumption of food, beverages and other essentials as well as pantry loading trends due to social distancing. Kellogg Company (K - Free Report) appears to be one such stock that is gaining on such trends.
Even food companies like Conagra (CAG - Free Report) , General Mills (GIS - Free Report) and TreeHouse Foods (THS - Free Report) are gaining on burgeoning demand amid the pandemic. Coming back to Kellogg, the packaged food behemoth’s brand strength through innovation and acquisitions are acting as drivers. Such upsides will likely help Kellogg battle concerns related to escalated costs and softness in the food away-from-home channel. Let’s delve deeper.
Impact of COVID-19
Kellogg has been benefiting from increased demand for packaged food products amid the coronavirus-led stockpiling. Such trends have 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). Notably, organic sales rose across regions, mostly due to elevated cereal sales that compensated for declines in snacks sales.
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. Kellogg delivered net sales of $3,465 million, which surpassed the consensus mark of $3,277 million. Adverse impacts from divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cone businesses as well as currency headwinds were offset by robust organic sales growth in other businesses, resulting from pandemic-led increased buying.
While higher at-home consumption is driving Kellogg’s retail demand, the company’s foodservice business is under pressure due to declines in food sold in the away-from-home network. This was witnessed in the second quarter of 2020, wherein away-from-home business fell sharply, with major declines across vending, travel and lodging and restaurants. Away-from-home sales related to travel are likely to remain soft for a while. The company predicts away-from-home demand to take some time to recover, and emerging markets to be affected by the slowing economies.
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 nearly 1% at cc compared with a 3-4% decline estimated before. Organic sales in the ongoing year are now estimated to grow around 5%, up from the previous guidance of 1-2%.
Brand-Building Efforts, Cost Concerns
Markedly, Kellogg boasts a solid product portfolio and brand identity in both cereals and snacks categories. Its portfolio consists of strong brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats among many others. Kellogg is dedicated toward augmenting its portfolio through adding more products under existing brands, innovation and marketing initiatives. The company has been focused on investing in brand-building efforts. In this respect, it invests in digital media, consumer promotions and traditional advertising.
In fact, Kellogg has a considerable amount of planned investments related to brands, supply-chain and commercial plans in the second half of 2020, which may impact margins. Apart from this, Kellogg has been incurring elevated costs related to operations amid the pandemic, such as costs around 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 stated that it expects to sustain direct costs associated with sanitization, safety and labor.
Nevertheless, Kellogg is on track with its productivity-saving initiatives as well as Deploy for Growth strategy. These along with the other abovementioned upsides are likely to boost Kellogg’s growth. Shares of this Zacks Rank #3 (Hold) company have gained 3.1% in the past six months compared with the industry’s growth of 16.4%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
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