On Jun 20, we issued an updated research report on
On May 1, the global snacks and cereal company reported
disappointing first-quarter 2014 results as the U.S. cereal sales
remained soft and international results weakened from last quarter.
Though first-quarter adjusted earnings of $1.01 per share beat the
Zacks Consensus Estimate, it declined 1% year over year due to weak
revenues and profits. Revenues declined 3.1% in the quarter once
again due to choppy cereal sales.
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 is hurting category growth. Though the company 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
behind innovation, marketing and supply-chain initiatives. We are
also encouraged by the growth potential, diversification and
international presence that the Pringles deal provides. Pringles,
acquired by Kellogg in Jun 2012 from
The Procter & Gamble Company
), has performed quite well. Sales and profit in the business have
exceeded management's expectations in every quarter since the
Moreover, brand building investments and cost saving programs
are expected to build as the year unfolds which management believes
will benefit organic sales.
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, will free up funds for brand
building, innovation and overall growth, it would take a couple of
years before delivering substantial results.
Another company that is being pressured by its cereals business
General Mills, Inc.
). General Mills' cereal sales declined 2% in fiscal 2013 due to
weak category growth.
Other Stocks to Consider
Kellogg currently carries a Zacks Rank #3 (Hold). A
better-ranked food stock is
The Hain Celestial Group Inc.
) which sports a Zacks Rank #1 (Strong Buy).
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