Kellogg Company’s K second-quarter 2018 adjusted earnings and revenues beat the Zacks Consensus Estimate. During the quarter, the top line benefited from contribution from the acquisition of RXBAR and consolidation of Multipro. Meanwhile, bottom-line performance gained from positive impacts of tax reforms. The solid performance also propelled management to uplift 2018 view.
Q2 in Detail
Second-quarter adjusted earnings of $1.14 per share came ahead of the Zacks Consensus Estimate of $1.05. The bottom line increased 17.5% year over year, supported by tax gains from the U.S. tax reforms and benefits from voluntary pension contributions carried out during the quarter.
Kellogg reported revenues of $3,360 billion, up almost 5.9% year over year. The upside can be primarily attributed to the takeover of RXBAR and consolidation of Multipro. On a constant-currency (cc) basis sales during the quarter improved 6.3%. The top line also outpaced the consensus mark of $3,322 million.
However, organic revenues were down 0.4%, as the underlying growth in revenues were offset by adjustments in list-price and transitions in the U.S. snacks business.
The company’s gross profit came in at $1,209 million, down 1.3% from the prior-year quarter’s level. Additionally, adjusted gross profit (at cc) came in at $1,203 million, down 3.1% year on year. Also, Kellogg’s adjusted gross margin (currency-neutral adjusted) in the quarter plunged 340 basis points (bps) from the year-ago quarter’s level.
Further, Kellogg’s adjusted operating margin (at cc) declined 0.8%, which contracted 30 bps year over year. This was primarily due to higher advertisement and promotional investments, which more than offset the gains from acquisition and consolidation.
Kellogg Company Price, Consensus and EPS Surprise
Segment Discussion
North America: Kellogg’s North America sales of $2,127 million declined 0.8% from the prior-year quarter’s level, mainly due to list-price adjustments and transitions in the U.S snacks category. These downsides marred the gains from underlying business growth and from RXBAR acquisition. Also, adjusted operating profit declined 3.4% year over year.
Europe: The segment’s revenues of $621 million improved 9.5% year on year, aided by favorable currency translations. Adjusted operating profit improved 6.8% year over year.
Latin America: Revenues of $239 million in the segment improved 3.5% year on year, aided by growth witnessed across Mexico and Central America, partially offset by truck strikes in Brazil. However, adjusted operating profit plunged 20.5% year over year.
Asia Pacific: The segment’s revenues of $373 million improved 60.8% year on year on the back of strong growth in cereals and snacks in the developed and emerging markets. The region also gained from the consolidation of Multipro. Adjusted operating profit improved 46.4% in the Asia Pacific.
Outlook
Management is impressed with solid growth witnessed in the first and second quarters of 2018. Further, this Zacks Rank #3 (Hold) company continues to expect yields from brand investments and gains from tax reforms.
That said, the company raised the top- and bottom-line projections for 2018. Kellogg now expects revenue growth in the range of of 4-5% (at cc) compared with the previous projection of 3-4%. The raised guidance reflects strong organic growth witnessed in the first half of the year. Also, the company raised adjusted earnings growth view to 11-13% (at cc) compared with the previous range of 9-11%. Further, adjusted operating profit growth (at cc) continues to be projected within 5-7%.
Price Performance
Shares of Kellog have gained 17.5% in the past three months, compared with the industry’s rise of 8.5%
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