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Kellogg (K) Sales Weak in 1H16: Will the Weakness Persist?
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We issued an updated research report on Kellogg Company (K - Free Report) on Aug 22.
Kellogg delivered mixed second-quarter 2016 results with earnings outperforming the Zacks Consensus Estimate but sales missing the same. Both metrics declined year over year due to significant negative Fx impact. However, excluding Fx, earnings of 91 cents per share surged 9% on Project K savings and inflation-driven pricing gains. Excluding extraordinary inflation in Venezuela, organic sales growth slipped 2% due to continued weakness in North America and Europe.
Kellogg has been struggling to raise sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses owing to lower demand.
Lower demand for cereals due to competitive pressures from other breakfast alternatives like yogurt, eggs, bread and peanut butter is hindering cereal category growth. Moreover, changing consumer views on health and wellness along with a shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight management cereal brands, like Special K and Kashi.
The U.S. snacks business has been also been stressed since 2013 owing to weak volumes. Though Pringles has been doing well, the U.S. snacks have been underperforming due to weakness in weight management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs owing to the same issues that affected sales of weight management cereal brands. The wholesome snacks business has also remained weak over the past few quarters due to lost distribution, including the effect of certain prior innovations that did not perform well.
Keeping in line with this, the company has invested in brand building, in-store capabilities along with product and packaging innovation as well as reformulating many existing products. Additionally cost savings from its re-structuring program – Project K – have been supporting renovation, innovation and brand support. Though initiatives led to better-than-expected results in 2015, the improved sales trends became unsustainable in the first half of 2016.
Despite sales being sluggish, Kellogg’s margin growth has been impressive. At the second quarter conference call, Kellogg raised its guidance for earnings and operating profit in 2016 owing to more price inflation in Venezuela than originally projected and higher savings from the zero-based budgeting (ZBB) program expected in the second half of the year. ZBB savings are anticipated to be in the range of $150--$180 million in 2016, higher than $100 million expected previously.
Notably, the company accelerated its margin improvement goal which should support profit/EPS growth.
During 2016-2018, adjusted profit margin is estimated to increase by approximately 350 basis points from 2015 levels, reaching approximately 18% by 2018. This is two years earlier than expected previously driven by the expansion of ZBB initiative in North America and internationally along with stronger price realization via better revenue growth management. Kellogg previously expected to reach a 17%--18% profit margin by 2020. The ZBB program is anticipated to generate $450--$500 million over the three year period from 2016-2018.
Kellogg has a Zacks Rank #3 (Hold). Some better-ranked food stocks Sysco Corporation (SYY - Free Report) , Ingredion Incorporated (INGR - Free Report) and Omega Protein Corporation . All the three stocks sport a Zacks Rank #1 (Strong Buy).
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Kellogg (K) Sales Weak in 1H16: Will the Weakness Persist?
We issued an updated research report on Kellogg Company (K - Free Report) on Aug 22.
Kellogg delivered mixed second-quarter 2016 results with earnings outperforming the Zacks Consensus Estimate but sales missing the same. Both metrics declined year over year due to significant negative Fx impact. However, excluding Fx, earnings of 91 cents per share surged 9% on Project K savings and inflation-driven pricing gains. Excluding extraordinary inflation in Venezuela, organic sales growth slipped 2% due to continued weakness in North America and Europe.
Kellogg has been struggling to raise sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses owing to lower demand.
KELLOGG CO Price
KELLOGG CO Price | KELLOGG CO Quote
Lower demand for cereals due to competitive pressures from other breakfast alternatives like yogurt, eggs, bread and peanut butter is hindering cereal category growth. Moreover, changing consumer views on health and wellness along with a shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight management cereal brands, like Special K and Kashi.
The U.S. snacks business has been also been stressed since 2013 owing to weak volumes. Though Pringles has been doing well, the U.S. snacks have been underperforming due to weakness in weight management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs owing to the same issues that affected sales of weight management cereal brands. The wholesome snacks business has also remained weak over the past few quarters due to lost distribution, including the effect of certain prior innovations that did not perform well.
Keeping in line with this, the company has invested in brand building, in-store capabilities along with product and packaging innovation as well as reformulating many existing products. Additionally cost savings from its re-structuring program – Project K – have been supporting renovation, innovation and brand support. Though initiatives led to better-than-expected results in 2015, the improved sales trends became unsustainable in the first half of 2016.
Despite sales being sluggish, Kellogg’s margin growth has been impressive. At the second quarter conference call, Kellogg raised its guidance for earnings and operating profit in 2016 owing to more price inflation in Venezuela than originally projected and higher savings from the zero-based budgeting (ZBB) program expected in the second half of the year. ZBB savings are anticipated to be in the range of $150--$180 million in 2016, higher than $100 million expected previously.
Notably, the company accelerated its margin improvement goal which should support profit/EPS growth.
During 2016-2018, adjusted profit margin is estimated to increase by approximately 350 basis points from 2015 levels, reaching approximately 18% by 2018. This is two years earlier than expected previously driven by the expansion of ZBB initiative in North America and internationally along with stronger price realization via better revenue growth management. Kellogg previously expected to reach a 17%--18% profit margin by 2020. The ZBB program is anticipated to generate $450--$500 million over the three year period from 2016-2018.
Kellogg has a Zacks Rank #3 (Hold). Some better-ranked food stocks Sysco Corporation (SYY - Free Report) , Ingredion Incorporated (INGR - Free Report) and Omega Protein Corporation . All the three stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>