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Kellogg to Gain from Cost-Cut Plans, U.S. Snacks Arm a Worry

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Kellogg Company (K - Free Report) remains on track with its four-year restructuring program named Project K, which is likely to drive the company’s bottom line.

Project K, announced in 2013, aims to optimize the supply chain through consolidation of facilities and elimination of excess capacity, and improve productivity through consolidation of common processes across multiple regions and bring a global focus on categories. Savings are being invested in brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales. Kellogg expects $600-$700 million in Project K cost savings, through 2019.

The company also started an aggressive zero-based budgeting (ZBB) program, in its North American business, to generate savings. The ZBB program was projected to generate $450-$500 million over the 2016-2018 period.  The company has realized annual savings from the ZBB program of $397 million through 2017 and expects cumulative savings to be approximately $450 to $500 million by the end of 2018.

Both these cost-effective actions have been supporting margins. In first-quarter 2018, Kellogg’s operating margin (currency-neutral comparable growth) was 14.7%, reflecting an improvement of 40 bps year over year. The uptick can be attributed to higher sales benefit and strong productivity savings related to the Project K restructuring program.

Apart from cost saving efforts, Kellogg is also undertaking measures to improve its food product portfolio. To this end, it is channeling funds toward product and packaging innovation, and reformulation of many existing products to meet the rapidly changing views of consumers regarding health and wellness. These upsides contributed to the shares of this Zacks Rank #3 (Hold) company that moved up 7.2% in the past three months outperforming the industry’s growth of 1.7%.

Softness in U.S. Snacks & Cereals Businesses

However, Kellogg’s U.S. snacks and U.S. cereal businesses have been performing poorly since the last few quarters. Sales in the former declined 4.2% year over year in the first quarter, owing to discontinued DSD operations and reduced workforce. In fact, the U.S. snacks business has been struggling since 2013 due to weak volumes. Though Pringles has been doing well, the deterioration in U.S. snacks is resulting from weakness in weight-management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs.  

On the other hand, revenues at the U.S. Morning Foods segment, which includes cereals, slipped 2.5% in the first quarter, due to changing consumer views on health and wellness. Kellogg’s mainstay U.S. cereal  business, which accounts for 40–45% of the sales, has been performing poorly since 2012 due to sluggish category growth.

Nonetheless, the company is trying to revamp both the segments through cost effective and aggressive innovation initiatives.

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