) reported lower profits and revenue in the second quarter of 2014
as cereal sales in developed markets remained challenging.
Moreover, management lowered its full-year outlook after witnessing
a poor run in the first half of the year. Shares declined 1% in
Second-quarter adjusted earnings of $1.02 per share were in line
with the Zacks Consensus Estimate as well as management's internal
goal of recording earnings of approximately $1.02 per share
quarter. Earnings were flat with the prior-year quarter as currency
benefits offset weak revenues and profits. The earnings results
included an unexpected 2-cent benefit from currency
Adjusted earnings exclude integration costs related to the Jun
2012 Pringles acquisition, costs associated with Project K
restructuring program and a mark-to-market loss. Including these
items, reported earnings were 82 cents per share, down 15% year
Kellogg Company - Earnings Surprise |
Revenues & Margins Weak
The world's largest cereal maker reported revenues of $3.69
billion in the quarter, down 0.8% year over year. Revenues also
missed the Zacks Consensus Estimate of $3.71 billion.
Management failed to live up to its internal expectation of
returning to positive top-line growth in the second quarter after
recording sales decline in the previous two quarters due to
weakness in the core cereals business in the developed
While volumes declined 2.5%, price/mix added 1% to sales.
Currency benefited sales by 0.7% while acquisitions and
dispositions had a neutral impact in the quarter. Accordingly,
organic revenues (excluding the impact of acquisitions,
dispositions and foreign exchange) declined 1.5% due to another
quarter of soft sales in the U.S. However, the international
business improved from last quarter and Pringles business continued
to do well.
Kellogg's adjusted operating profit declined 7.2% to $567
million comparing unfavorably with management's expectation of it
declining only slightly. Lower sales and higher brand building
investments took a toll on profits in the quarter. Profits were
weak in the U.S. as well as in Asia-Pacific but the same improved
in Europe and Latin America.
: Kellogg North America sales decreased 3.7% (down 3.4%
organically) from the prior-year quarter to $2.35 billion hurt by
sales decline in cereals and snacks. Price/mix added 0.6% to
revenue growth, while volumes declined 4%.
Organically, the U.S. Morning Foods business, which includes
cereals such as Corn Flakes and Special K, declined 4.9% in the
quarter. Kellogg's 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 is hurting cereal category growth. Though the company is
trying to reinvigorate this segment through innovation and
aggressive marketing campaigns, these activities are yet to show
The U.S. Snacks businesses declined 2.7% in the quarter, failing
to maintain the improvement witnessed in the first quarter. The
U.S. Specialty Channels business improved 1.4% organically and the
North America Other business went down 4.9%.
Adjusted operating profit declined 8.7% in the quarter due to
weak volumes and increased brand building costs.
The international segment improved from a softer performance in
the previous quarter due to significant sales rebound in Latin
During the quarter, revenues in Europe improved 0.7% organically
to $772 million. Asia Pacific improved 0.5% organically to $243
million. Latin America improved 6.9% to $320 million due to pricing
gains and innovation.
Adjusted operating profit improved 5.1% in Europe and 6% in
Latin America but declined 65.2% in Asia Pacific.
2014 Guidance Lowered
In 2014, organic revenues are expected to decline between 1% and
2%, lower than prior expectations of increasing approximately 1%.
The sales guidance excludes the impact of currency as well as an
extra week in the year.
Also, adjusted operating profit is expected to decline between
1% and 3% comparing unfavorably with the previous guidance of its
remaining flat or grow up to 2% in the year.
Adjusted earnings per share (excluding currency headwinds) are
expected in the range of $3.81-$3.89 per share, lower than prior
range of $3.89-$3.97. The new earnings guidance represents negative
1% to positive 1% growth rate versus prior expectation of a range
of positive 1-3%.
The adjusted operating profit and earnings guidance exclude the
impact of market adjustments, costs related to Project K and the
expected benefit from an extra week in 2014. The 53
week is expected to add 7 cents to reported earnings per share for
the year. Moreover, currency benefits are expected to add another 3
cents to earnings. Including the 53
week benefit and currency tailwinds, earnings per share are
expected to range between $3.91 and $3.99.
The organic sales, adjusted operating profit as well as earnings
per share guidance are far below the long-term targets - suggesting
that 2014 could prove to be worse than 2013.
Other Stocks to Consider
Kellogg currently carries a Zacks Rank #4 (Sell). Better-ranked
food stocks include Treehouse Foods, Inc. (
) Pinnacle Foods Inc. (
) and J&J Snack Foods Corp. (
). While Treehouse carries a Zacks Rank #1 (Strong Buy), Pinnacle
Foods and J&J Snack Foods carry a Zacks Rank #2 (Buy).
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
KELLOGG CO (K): Free Stock Analysis Report
J&J SNACK FOODS (JJSF): Free Stock Analysis
PINNACLE FOODS (PF): Free Stock Analysis Report
TREEHOUSE FOODS (THS): Free Stock Analysis
To read this article on Zacks.com click here.