On Nov 12, we issued an updated research report on Kellogg Company (K).
On Oct 30, the global snacks and cereal company reported better-than-expected earnings and profits for the third quarter of 2014. However, sales continued to decline as cereal sales in the developed markets remained challenging.
Third-quarter earnings of 94 cents per share beat the Zacks Consensus Estimate by a penny, but declined 3.1% year over year due to weak revenues. Soft cereal sales in the developed markets lowered revenues by 2.1%. The top-line performance was below management’s expectations due to below-par sales in the U.S. cereals and snacks businesses. In fact, Kellogg has reported weak sales results in all the three quarters of 2014, reported so far.
Kellogg’s mainstay U.S. cereal business, accounting for 40–45% of sales, has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives such as yogurt, eggs, bread and peanut butter are hurting category growth.
Moreover, changing consumer views on health and wellness and shift in consumer attitude from dieting to health and wellness has hurt the sales of Kellogg’s weight management cereal brands, like Special K. The U.S. snacks business has also been struggling since 2013 due to weak volumes.
In fact, Kellogg’s organic sales, adjusted operating profit as well as earnings per share guidance for 2014 are far below the long-term targets — suggesting that 2014 could prove to be worse than 2013. We believe it is difficult for the company to achieve growth this year and possibly even in 2015 given the combination of weak sales trends and reinvestments in the business.
Though Kellogg is trying to reinvigorate this segment through innovation and aggressive marketing campaigns, these activities are yet to show results. More recently, the company witnessed cereal category weakness in other developed countries like the U.K., Canada and Australia.
However, Kellogg has strong fundamentals with its solid brand positioning, geographic diversity and significant investments in innovation, marketing and supply-chain initiatives. We are also encouraged by its growth potential, diversification and international presence that the Pringles deal provides.
Pringles, acquired by Kellogg in Jun 2012 from The Procter & Gamble Company (PG), has performed quite well. Sales and profit in the business have exceeded management’s expectations in every quarter since the transaction closed. The international business is also doing well.
Nevertheless, our expectations for sales acceleration are muted as the cereal category continues to contract. Moreover, even though the new cost savings plan, Project K lends support for brand building, innovation and overall growth, it would take a couple of years before it delivers substantial results.
Another company that is being pressured by its cereals business is General Mills, Inc. (GIS). The company’s cereal sales declined 2% in fiscal 2013 and remained flat in 2014 due to weak category growth. Other food companies suffering due to top-line pressures are Kraft Foods Group Inc. (KRFT) and Mondelez International.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment