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Will Kellogg's Cost Cut & Renovation Efforts Bring a Change?

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On Sep 8, we issued an updated research report on Kellogg Company (K - Free Report) — one of the leading food companies.

Kellogg has been in operations for over 100 years, leveraging on its solid portfolio and brand recognition in both cereals and snacks. Lately, the company has been struggling to boost sales mainly due to weak demand for its cereal and U.S. category products.

Lower demand for cereals due to competitive pressure from other breakfast alternatives, including yogurt, eggs, bread and peanut butter, has been hurting category growth. Moreover, changing consumer view on health and wellness and shift in consumer taste from diet to health and wellness products has hurt sales of Kellogg’s weight-management cereal brands — Special K and Kashi.

The U.S. snacks business has been facing weak volumes since 2013. The wholesome snacks business has also been struggling over the past few quarters due to lost distribution and the underperformance of certain prior innovations. In the first six months of 2017, net sales at the segment dropped 3% year over year.

In order to counter weak sales, the company has decided to extend its previously-announced efficiency and effectiveness program (Project K) in February 2017. Project K had generated savings of around $180 million in 2015 and $300 million in 2016. These savings are being invested in brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales.

Also, Kellogg’s decision to change the method of distribution of U.S. snacks is expected to boost Project K savings by $125 million to $175 million. The company expects $600 million to $700 million in Project K savings through 2019.

Apart from Project K, Kellogg has initiated an aggressive zero-based budgeting (ZBB) program which is anticipated to generate $450-$500 million in the 2016-2018 period.

However, the cost-saving initiatives alone are not enough. The company also needs to innovate and diversify its line of offerings to keep up with changing consumer needs. In keeping with this, Kellogg is channeling funds toward product and packaging innovation as well as reformulating many existing products.

The company has completely redesigned the Special K brand in the domestic market and is presently re-positioning it as a healthy lifestyle brand. It has also converted all the Kashi products to GMO-free in the United States. Further, it is striving to remove artificial colors and flavors in cereals and a variety of snack bars as well as Eggo frozen foods by the end of 2018.

The company has chalked out several initiatives for 2017 for the cereals category. These include innovation in the Frosted Flakes and Raisin Bran Crunch flavors as well as core food improvement of one of its biggest brands — Mini-Wheats.

Bottom Line

Persistently soft sales have led to a 12.2% decline in the company’s shares in the past year. The stock has also been trading below its industry. Estimates for the current quarter went down 2.2% in the last 60 days but moved north for the current and next year by 1.3% and 0.9%, respectively.

These mixed expectations indicate that while the stock’s growth story is quite compelling for the long term, analysts are apprehensive about this Zacks Rank #3 (Hold) stock’s prospects in the near future.

Thus, though Kellogg is facing tepid sales, its cost-saving initiatives, aggressive innovation/renovation efforts should drive growth over the long haul.

Stocks to Consider

A few better-ranked stocks in this sector are Nomad Foods Limited (NOMD - Free Report) , The Chefs' Warehouse, Inc. (CHEF - Free Report) and Ingredion Incorporated (INGR - Free Report) . While Nomad Foods sports a Zacks Rank #1 (Strong Buy), Chefs' Warehouse and Ingredion carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nomad Foods’ current-year expected earnings growth is 20.7%.

Current quarter’s expected earnings growth for Chefs' Warehouse is 42.9%.

Ingredion projects current-quarter expected earnings growth of 3.6%.

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