Kellogg Company (K - Free Report) has been navigating through rough waters for some time now due to high costs related to brand enhancement along with stiff competition, currency headwinds and soft U.S. snacks and Morning Foods businesses. These factors also weighed upon the company’s fourth-quarter 2018 results, wherein the bottom line declined year over year and the top line fell short of the Zacks Consensus Estimate. (Read: Kellogg Q4 Earnings Decline Year Over Year, Sales Rise)
Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. We note that the estimates for current- and next-year earnings have moved south by 28 cents and 21 cents to $3.99 and $4.26, respectively, over the past 30 days.
Moreover, shares of this renowned food company, specializing in cereals and snacks is hovering close to its 52-week low of $54.08. In the past six months, this Zacks Rank #4 (Sell) stock has lost 26.6%, wider than the industry’s decline of around 14%. Let’s take a look at the reasons behind the company’s dismal run.
Weak U.S. Snacks Business
Kellogg’s U.S. snacks business has been struggling since 2013 due to weak volumes. Although 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 due to the same issues that hurt sales of weight-management cereal brands.
The wholesome snacks business has mostly remained weak over the past few quarters due to lost distribution including the effect of certain prior innovations that underperformed. Though management is working to revive the business through investments in innovation and better in-store execution, the efforts are yet to bear fruit. In fact, challenges in the U.S. Snacks, Morning Foods and U.S. Specialty Channels categories weighed on Kellogg’s North America sales that declined on an organic basis in 2018.
Soft Morning Foods Business
Kellogg’s mainstay U.S. cereal business, which accounts for a major portion of its sales, has been underperforming since 2012 due to sluggish category growth. Revenues at the U.S. Morning Foods category, which includes cereals, slipped 5.2% in 2017. Lower demand for cereals due to competitive pressures from other breakfast alternatives has been hurting the category. Further, sales in the U.S. Morning Foods category fell more than 2% in 2018, primarily on lower cereal consumption that stemmed from supply-chain hurdles related to Honey Smacks and category-wide weakness. Also, adjusted operating profit at this segment was down 10% in 2018 on account of lower sales, adverse mix as well as costs associated with new pack formats.
Kellogg stated that it continues to witness increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions. The company plans to continue with these investments in 2019, which is likely to elevate its cost burden. These costs along with mix shifts are likely to weigh on adjusted operating profit in the year. Moreover, the absence of tax benefits is expected to hurt the bottom line that is anticipated to decline 5-7% (at cc) in 2019.
Nevertheless, the company’s sales picture looks bright, courtesy of its significant buyouts that also provided a boost to the top line in the fourth quarter. Further, Kellogg expects revenues to grow about 3-4% in 2019 backed by Multipro’s consolidation and organic sales growth. Also, Kellogg’s revenue-growth management efforts are likely to fuel volumes and price/mix.
However, it remains to be seen if the aforementioned efforts can help win back investor’s confidence.
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