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Will Cost-Saving Plans Benefit Kellogg (K) in Q1 Earnings?
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Kellogg Company (K - Free Report) is set to report first-quarter 2018 results on May 3, before the opening bell. In the last reported quarter, the company’s earnings met the Zacks Consensus Estimate. Meanwhile, it surpassed expectations in three of the trailing four quarters, the average beat being 5.82%.
The company’s top line remained subdued since 2014, primarily due to lower demand in North America. Particularly, sluggish performance of its cereal products in the developed markets as well as a soft U.S. snacks business have been affecting the company. Kellogg missed analysts’ expectations on sales in five of the past 11 quarters.
The food industry in the region is experiencing changes in consumer preference toward natural and organic ingredients over packaged and processed food. In fact, the food industry, including legacy brands like General Mills Inc. (GIS - Free Report) , The Kraft Heinz Company (KHC - Free Report) and Mondelez International, Inc. (MDLZ - Free Report) , has been displaying a dismal performance for quite some time.
Let’s see how things are shaping up prior to this announcement.
Business in North America Weak
The North America business accounts for about more than 65% of Kellogg’s total revenues. Hence, it is evident that revenues generated from this segment largely impact overall sales of the company. The segment is further categorized into U.S. Morning Foods, U.S. Snacks, U.S. Specialty and North America Other.
In the last reported quarter, Kellogg’s total North America sales declined 1.7% year over year to $2.1 billion (down 3.3% organically), owing to the exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and continued consumption softness in U.S. cereal business (particularly in the health and wellness segment). Moreover, in 2017, sales declined 2.6% from the prior-year period (down 3% organically). The trend is expected to continue in the to-be-reported quarter as well. Overall, for the first quarter, the Zacks Consensus Estimate for North America segment revenues is pegged at $2.3 billion, implying a 1.7% decline year over year. Conversely, these are likely to improve 7.5% sequentially.
North America Business by Segment
U.S. Morning Foods: Kellogg’s mainstay U.S. cereal business, accounting for 40-45% of sales, has been performing poorly for quite some time now. Lower demand for cereals due to competitive pressure from other breakfast alternatives, including yogurt, eggs, bread and peanut butter, has been hurting category growth. In the last reported quarter, revenues slipped 4.9% and declined 5.2% in 2017. The trend is expected to persist in the to-be-reported quarter, with revenues likely to decline 4.6% year over year but improve 2.4% sequentially, per the consensus estimate.
U.S. Snacks: This business has been struggling since 2013 due to weak volumes. In the fourth quarter, sales declined 5.8% from the year-ago level due to discontinued shipping through its DSD distribution system, reducing workforce, and exiting leases for its distribution centers, trucks, and other equipment and SKU rationalization. In 2017, the segment’s net sales dropped 4.1% year over year. The trend is expected to continue in the to-be-reported quarter as well, with revenues likely to decline 5.9% year over year but improve 1.7% sequentially, per the consensus estimate.
U.S. Specialty: This segment’s sales rose 2.1% in the last reported quarter, marking the 10th straight quarter of sales growth, given strength in the convenience and foodservice channels, such as K-12 schools. The Zacks Consensus Estimate for U.S. Specialty segment revenues is pegged at $396 million, implying a 0.3% year-over-year and 37.5% sequential increase.
North America Other: Segmental revenues grew 9.6% in the fourth quarter on contribution from frozen foods. The trend is expected to continue in the to-be-reported quarter with revenues likely to increase 10.9% from the prior-year quarter and 5.8% sequentially, per the consensus estimate.
Europe revenues in the first quarter are likely to witness 12.1% growth from the year-ago level but a decline of 6.5% from the prior quarter. However, revenues for Latin America are likely to witness a 0.9% decline from the year-ago level and 15.1% from the prior quarter. For Asia Pacific, revenues are expected to register 4.7% year-over-year rise in the quarter. Sequentially, revenues are expected to be in line.
Overall Earnings & Revenue Expectations
The Zacks Consensus Estimate for total revenues of $3.32 billion indicates a 2% uptick on a year-over-year basis. In 2017, net sales declined 0.7% (down 2.6% organically), with volumes down 3.1% as a result of soft consumption trends across most categories during the period.
Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. The company is investing in brand building, in-store capabilities, along with product and packaging innovation. Also, revenues are expected to benefit from Pringles’ improved performance in Europe, the Parati acquisition in Brazil, better shipments, and improvement in pricing and mix in Mexico and Australia.
Meanwhile, cost-saving initiatives like Project K and zero-based budgeting program are somewhat compensating for the sales decline. Although the top line has been discouraging, Kellogg’s margin growth has been impressive. Pricing and mix improvement is anticipated to lend support to the company’s bottom-line growth. Currency headwinds are also likely to subside, further supporting EPS growth.
List price adjustments owing to its DSD transition and weak cereal volumes in the United States are gross margin headwinds in the first quarter. Higher logistic expenses also remain a drag. Expenses related to brand building initiatives are likely to hit operating margin to some extent in the to-be-reported quarter.
Earnings increased 5.5% year over year in the last reported quarter. Notably, the consensus estimate for first-quarter earnings is pegged at $1.08, reflecting a 1.9% year-over-year increase.
Here is What Our Quantitative Model Predicts:
Kellogg does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — that are required to be confident of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: The Earnings ESP for Kellogg is -0.34%.
Zacks Rank: Kellogg carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.
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Image: Bigstock
Will Cost-Saving Plans Benefit Kellogg (K) in Q1 Earnings?
Kellogg Company (K - Free Report) is set to report first-quarter 2018 results on May 3, before the opening bell. In the last reported quarter, the company’s earnings met the Zacks Consensus Estimate. Meanwhile, it surpassed expectations in three of the trailing four quarters, the average beat being 5.82%.
The company’s top line remained subdued since 2014, primarily due to lower demand in North America. Particularly, sluggish performance of its cereal products in the developed markets as well as a soft U.S. snacks business have been affecting the company. Kellogg missed analysts’ expectations on sales in five of the past 11 quarters.
The food industry in the region is experiencing changes in consumer preference toward natural and organic ingredients over packaged and processed food. In fact, the food industry, including legacy brands like General Mills Inc. (GIS - Free Report) , The Kraft Heinz Company (KHC - Free Report) and Mondelez International, Inc. (MDLZ - Free Report) , has been displaying a dismal performance for quite some time.
Kellogg Company Price and EPS Surprise
Kellogg Company Price and EPS Surprise | Kellogg Company Quote
Let’s see how things are shaping up prior to this announcement.
Business in North America Weak
The North America business accounts for about more than 65% of Kellogg’s total revenues. Hence, it is evident that revenues generated from this segment largely impact overall sales of the company. The segment is further categorized into U.S. Morning Foods, U.S. Snacks, U.S. Specialty and North America Other.
In the last reported quarter, Kellogg’s total North America sales declined 1.7% year over year to $2.1 billion (down 3.3% organically), owing to the exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and continued consumption softness in U.S. cereal business (particularly in the health and wellness segment). Moreover, in 2017, sales declined 2.6% from the prior-year period (down 3% organically). The trend is expected to continue in the to-be-reported quarter as well. Overall, for the first quarter, the Zacks Consensus Estimate for North America segment revenues is pegged at $2.3 billion, implying a 1.7% decline year over year. Conversely, these are likely to improve 7.5% sequentially.
North America Business by Segment
U.S. Morning Foods: Kellogg’s mainstay U.S. cereal business, accounting for 40-45% of sales, has been performing poorly for quite some time now. Lower demand for cereals due to competitive pressure from other breakfast alternatives, including yogurt, eggs, bread and peanut butter, has been hurting category growth. In the last reported quarter, revenues slipped 4.9% and declined 5.2% in 2017. The trend is expected to persist in the to-be-reported quarter, with revenues likely to decline 4.6% year over year but improve 2.4% sequentially, per the consensus estimate.
U.S. Snacks: This business has been struggling since 2013 due to weak volumes. In the fourth quarter, sales declined 5.8% from the year-ago level due to discontinued shipping through its DSD distribution system, reducing workforce, and exiting leases for its distribution centers, trucks, and other equipment and SKU rationalization. In 2017, the segment’s net sales dropped 4.1% year over year. The trend is expected to continue in the to-be-reported quarter as well, with revenues likely to decline 5.9% year over year but improve 1.7% sequentially, per the consensus estimate.
U.S. Specialty: This segment’s sales rose 2.1% in the last reported quarter, marking the 10th straight quarter of sales growth, given strength in the convenience and foodservice channels, such as K-12 schools. The Zacks Consensus Estimate for U.S. Specialty segment revenues is pegged at $396 million, implying a 0.3% year-over-year and 37.5% sequential increase.
North America Other: Segmental revenues grew 9.6% in the fourth quarter on contribution from frozen foods. The trend is expected to continue in the to-be-reported quarter with revenues likely to increase 10.9% from the prior-year quarter and 5.8% sequentially, per the consensus estimate.
Europe revenues in the first quarter are likely to witness 12.1% growth from the year-ago level but a decline of 6.5% from the prior quarter. However, revenues for Latin America are likely to witness a 0.9% decline from the year-ago level and 15.1% from the prior quarter. For Asia Pacific, revenues are expected to register 4.7% year-over-year rise in the quarter. Sequentially, revenues are expected to be in line.
Overall Earnings & Revenue Expectations
The Zacks Consensus Estimate for total revenues of $3.32 billion indicates a 2% uptick on a year-over-year basis. In 2017, net sales declined 0.7% (down 2.6% organically), with volumes down 3.1% as a result of soft consumption trends across most categories during the period.
Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. The company is investing in brand building, in-store capabilities, along with product and packaging innovation. Also, revenues are expected to benefit from Pringles’ improved performance in Europe, the Parati acquisition in Brazil, better shipments, and improvement in pricing and mix in Mexico and Australia.
Meanwhile, cost-saving initiatives like Project K and zero-based budgeting program are somewhat compensating for the sales decline. Although the top line has been discouraging, Kellogg’s margin growth has been impressive. Pricing and mix improvement is anticipated to lend support to the company’s bottom-line growth. Currency headwinds are also likely to subside, further supporting EPS growth.
List price adjustments owing to its DSD transition and weak cereal volumes in the United States are gross margin headwinds in the first quarter. Higher logistic expenses also remain a drag. Expenses related to brand building initiatives are likely to hit operating margin to some extent in the to-be-reported quarter.
Earnings increased 5.5% year over year in the last reported quarter. Notably, the consensus estimate for first-quarter earnings is pegged at $1.08, reflecting a 1.9% year-over-year increase.
Here is What Our Quantitative Model Predicts:
Kellogg does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — that are required to be confident of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: The Earnings ESP for Kellogg is -0.34%.
Zacks Rank: Kellogg carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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