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Kellogg (K) Gains on Portfolio Strength, Hurt by High Costs
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Kellogg Company (K - Free Report) has been benefiting from its portfolio strength, fueled by its efforts to undertake innovation. The convenience food maker is keen on expanding its business through acquisitions. However, the company is not immune to the rising inflationary environment and supply chain-related headwinds.
Let’s discuss this further.
Portfolio Strength Aids
Kellogg’s portfolio consists of strong brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats, among many others. The company’s frozen foods brands like Morningstar Farms and Eggo have also been aiding growth. In its second-quarter 2022 earnings call, management highlighted that its world-class snacks brands continued to deliver robust performance across markets worldwide during the ongoing year.
Kellogg is augmenting its portfolio by adding more products under existing brands, innovation and marketing initiatives. The company is focused on investing in brand-building efforts. K invests in digital media, consumer promotions and traditional advertising. Kellogg has also been enhancing its in-store capabilities — like increasing the sales force of its struggling businesses.
Image Source: Zacks Investment Research
Prudent Buyouts
In line with the strategy to diversify its organic offerings, Kellogg acquired protein bar maker Chicago Bar Company in 2017. Chicago Bar Company makes RXBAR, considered one of the fastest-growing nutrition bar brands in the United States. The company’s Pringles buyout has been lucrative. With the Pringles deal, Kellogg transformed itself from what was essentially a large U.S. snacks business to a true global snacks player. Kellogg also continues to expand its acquired brands through new product introductions.
Several other companies in the food space, like The Kraft Heinz Company (KHC - Free Report) , Hormel Foods Corporation (HRL - Free Report) and McCormick & Company, Incorporated (MKC - Free Report) , are benefiting from acquisitions.
In April 2022, Kraft Heinz acquired a majority stake in a Brazil-based condiments and sauces company — Companhia Hemmer Indústria e Comércio ("Hemmer"). The buyout will widen Kraft Heinz's International Taste Elevation platform and broaden its presence across emerging markets. In January 2022, KHC acquired an 85% stake in Germany-based Just Spices GmbH (“Just Spices”). The buyout enhances its direct-to-consumer operations and go-to-market expansion.
Hormel Foods is strengthening its business through strategic acquisitions. In June, HRL acquired the Planters snacking portfolio from Kraft Heinz. Prior to this, it acquired Texas-based pit-smoked meats company Sadler's Smokehouse in March 2020. The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.
McCormick strategically increased its presence through acquisitions, strengthening its portfolio. In December 2020, MKC bought a 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio helps McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. In November 2020, McCormick acquired the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand.
What’s Hurting Kellogg?
Kellogg is seeing adverse impacts of input cost inflation and supply disruptions. During second-quarter 2022, Kellogg witnessed a 1.5% unfavorable impact from volumes, hurting its net sales to some extent. Volume remained under pressure by supply-chain bottlenecks and shortages. In Europe, Latin America and AMEA regions, volumes were hurt by 2.5%, 5.5% and 4.4%, respectively.
It has been battling a drab gross margin for a while, which persisted in the second quarter. The company’s adjusted gross margin came in at 32.4%, down from 34.2% reported in the year-ago quarter. Management expects input cost inflation to remain higher than productivity and revenue growth management offsets. It also assumes no moderation in supply-chain bottlenecks and shortages until the fourth quarter of 2022.
That being said, we believe that Kellogg‘s aforementioned upsides will likely keep aiding growth. Shares of the Zacks Rank #3 (Hold) company have increased 19.6% in the past six months compared with the industry’s growth of 4.5%.
Image: Shutterstock
Kellogg (K) Gains on Portfolio Strength, Hurt by High Costs
Kellogg Company (K - Free Report) has been benefiting from its portfolio strength, fueled by its efforts to undertake innovation. The convenience food maker is keen on expanding its business through acquisitions. However, the company is not immune to the rising inflationary environment and supply chain-related headwinds.
Let’s discuss this further.
Portfolio Strength Aids
Kellogg’s portfolio consists of strong brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats, among many others. The company’s frozen foods brands like Morningstar Farms and Eggo have also been aiding growth. In its second-quarter 2022 earnings call, management highlighted that its world-class snacks brands continued to deliver robust performance across markets worldwide during the ongoing year.
Kellogg is augmenting its portfolio by adding more products under existing brands, innovation and marketing initiatives. The company is focused on investing in brand-building efforts. K invests in digital media, consumer promotions and traditional advertising. Kellogg has also been enhancing its in-store capabilities — like increasing the sales force of its struggling businesses.
Image Source: Zacks Investment Research
Prudent Buyouts
In line with the strategy to diversify its organic offerings, Kellogg acquired protein bar maker Chicago Bar Company in 2017. Chicago Bar Company makes RXBAR, considered one of the fastest-growing nutrition bar brands in the United States. The company’s Pringles buyout has been lucrative. With the Pringles deal, Kellogg transformed itself from what was essentially a large U.S. snacks business to a true global snacks player. Kellogg also continues to expand its acquired brands through new product introductions.
Several other companies in the food space, like The Kraft Heinz Company (KHC - Free Report) , Hormel Foods Corporation (HRL - Free Report) and McCormick & Company, Incorporated (MKC - Free Report) , are benefiting from acquisitions.
In April 2022, Kraft Heinz acquired a majority stake in a Brazil-based condiments and sauces company — Companhia Hemmer Indústria e Comércio ("Hemmer"). The buyout will widen Kraft Heinz's International Taste Elevation platform and broaden its presence across emerging markets. In January 2022, KHC acquired an 85% stake in Germany-based Just Spices GmbH (“Just Spices”). The buyout enhances its direct-to-consumer operations and go-to-market expansion.
Hormel Foods is strengthening its business through strategic acquisitions. In June, HRL acquired the Planters snacking portfolio from Kraft Heinz. Prior to this, it acquired Texas-based pit-smoked meats company Sadler's Smokehouse in March 2020. The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.
McCormick strategically increased its presence through acquisitions, strengthening its portfolio. In December 2020, MKC bought a 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio helps McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. In November 2020, McCormick acquired the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand.
What’s Hurting Kellogg?
Kellogg is seeing adverse impacts of input cost inflation and supply disruptions. During second-quarter 2022, Kellogg witnessed a 1.5% unfavorable impact from volumes, hurting its net sales to some extent. Volume remained under pressure by supply-chain bottlenecks and shortages. In Europe, Latin America and AMEA regions, volumes were hurt by 2.5%, 5.5% and 4.4%, respectively.
It has been battling a drab gross margin for a while, which persisted in the second quarter. The company’s adjusted gross margin came in at 32.4%, down from 34.2% reported in the year-ago quarter. Management expects input cost inflation to remain higher than productivity and revenue growth management offsets. It also assumes no moderation in supply-chain bottlenecks and shortages until the fourth quarter of 2022.
That being said, we believe that Kellogg‘s aforementioned upsides will likely keep aiding growth. Shares of the Zacks Rank #3 (Hold) company have increased 19.6% in the past six months compared with the industry’s growth of 4.5%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.