On Nov 29, we issued an updated research report on Kellogg Company K. The company’s shares have been lagging the broader Zacks categorized Food-Miscellaneous/Diversified Market since the beginning of the year. The stock has gained only 1.9% year to date, compared with the 5.4% gain of the broader food market.
Kellogg’s organic sales (excluding the extraordinary inflationary gains in Venezuela) declined 1.6% in the third quarter, 2% in the second quarter and 1% in first-quarter 2016 due to persistent weakness in North America and Europe. North America core sales declined 2.3% in the first nine months of 2016 due to soft U.S. cereals and snack sales. This, in turn, compelled Kellogg to lower its 2016 sales guidance thrice this year. Kellogg has been struggling to boost sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses, thanks to lower demand.
Again, Kellogg’s mainstay U.S. cereal business, which accounts for 40–45% of the sales, has been weak since 2012 due to sluggish category growth. Moreover, changing consumer views on health and wellness and shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight-management cereal brands like Special K and Kashi.
Meanwhile, 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 due to the same issues that hurt sales of weight-management cereal brands.
Initiatives Driving Margins
Kellogg boasts a legacy of over 100 years built on solid product portfolio and brand identity in both cereals and snacks. Popular Kellogg’s brands include Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Murray, Austin, Morningstar Farms, Famous Amos, Ready Crust and Kashi. In Jun 2012, the company acquired Procter & Gamble’s snack unit, Pringles, which is now its second largest brand.
Meanwhile, in order to improve its sales performance, Kellogg is investing in brand building such as digital media, consumer promotions and traditional advertising. It is also investing in in-store capabilities like increasing the sales forces of its struggling businesses — cereals and snacks.
Importantly, the company is following aggressive cost-saving initiatives. In Nov 2013, Kellogg announced a four-year restructuring program, Project K, to spur growth and profits. The program aims to optimize the supply chain through consolidation of facilities and elimination of excess capacity, improvement of productivity through consolidation of common processes or business services across multiple regions and functions along with bringing in a new global focus on categories.
Project K generated savings of around $180 million in 2015 and is likely to garner approximately $100 million of incremental savings in 2016. Annual cost savings from Project K are expected to be approximately $425–$475 million by 2018.
Apart from Project K, the company started an aggressive zero-based budgeting (ZBB) program in 2015 in its North American business to generate savings. During 2016, the ZBB program was expanded to include the international segments of the business. The ZBB program is expected to generate an additional $150–$180 million in savings in 2016 and $450–$500 million over the 2016–2018 period.
During the third quarter, operating margin was up 260 basis points due to the favorable impact to brand-building investment from ZBB efficiencies, savings realized from Project K and ZBB, and lower restructuring costs, integration costs and Venezuela remeasurement. Currency-neutral comparable operating margin rose 110 basis points after excluding the year-over-year impact of restructuring, integration costs, Venezuela remeasurement, and foreign currency. During 2016–2018, adjusted profit margin is expected to increase by approximately 350 basis points from 2015 levels to approximately 18% by 2018.
Zacks Rank & Key Picks
Kellogg currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the food space include General Mills, Inc. GIS, Lancaster Colony Corporation LANC and Mondelez International, Inc. MDLZ, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
General Mills has a decent earnings surprise history, beating the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being4.37%.
Lancaster Colony’s fiscal 2017 earnings are expected to grow 7.3%.
Mondelez will likely witness 11.5% EPS growth in 2016.
"Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>"
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.
Zacks Investment Research