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Kellogg Beats Q1 Earnings & Sales Despite Fx, Keeps View - Analyst Blog

Kellogg CompanyK reported better-than-expected first-quarter results, beating the Zacks Consensus Estimate for both earnings and sales despite negative currency impact.

The world's largest cereal maker also re-affirmed its 2015 outlook for sales and earnings on a currency neutral basis.

Earnings Discussion

First-quarter adjusted earnings of 98 cents per share declined 3% year over year due to significant currency headwinds.

However, earnings beat the Zacks Consensus Estimate of 92 cents by 6.5% as well as the company's expectations. Excluding currency headwinds of 6 cents, earnings increased 3% year over year on the back of improved sales trends, lower taxes and Project K cost savings.

Adjusted earnings exclude integration costs, costs associated with Project K restructuring program, a mark-to-market loss and certain other items. Including these items, reported loss was 64 cents per share, down almost 43% year over year.

Kellogg Company - Earnings Surprise | FindTheCompany

Some Improvement in Revenues

Kellogg's reported revenues of $3.56 billion declined 5% year over year due to significant currency headwinds.

As Kellogg generates around 40% of its net sales outside the U.S. as a strong dollar lowered the value of its international sales. With almost all foreign currencies deteriorating versus the U.S. dollar, currency translations are posing a significant headwind in 2015, thereby limiting revenue growth.

Currency hurt sales by 4.7%, while acquisitions and dispositions had a negligible impact on the results. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) declined 0.3%.

However, organic revenues improved from a decline of 2.2% in the previous quarter due to better volumes and pricing gains. Revenues also marginally beat the Zacks Consensus Estimate of $3.55 billion.

Volumes declined 0.7% better than a 2.3% shortfall in the previous quarter driven by improved sales trends in U.S. cereals and snacks businesses and higher organic sales growth in international markets. On the other hand, price/mix added 0.4% to sales, better than 0.1% in the previous quarter.

Profits Down

Kellogg's adjusted operating profit declined 1.9% to $548 million on a currency neutral basis due to lower sales and higher brand building investments. Profits declined in North America and Asia Pacific, while it improved in Europe and Latin America.

Segment Discussion

North America : Kellogg's North America sales declined 3.7% (down 2.8% organically) year over year to $2.42 billion led again by a drop in cereals and snacks sales.

However, encouragingly, the decline in organic revenues was better than 3.9% shortfall seen in the previous quarter due to improved sales trends in both cereals and snacks.

Price/mix declined 0.5% and volumes decreased 2.5%.

Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, declined 2.9%.

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 are hurting category growth. Moreover, changing consumer views on health and wellness and shift in consumer attitude from reduced calories to weight and wellness is hurting sales of Kellogg's low-calorie cereals, like Special K and Kashi.

However, organic sales decline in the U.S. Morning Foods business was better than the 7.7% shortfall seen in the previous quarter due to improved trends in cereals.

The company is trying to reinvigorate this segment through increased innovation, better in-store execution and brand building. It seems that these activities have started to show results. At the last conference call, management stated that sales in the U.S. cereal business will decline again in 2015 but trends are expected to improve from 2014 levels.

The U.S. Snacks businesses - struggling since 2013 due to weak volumes - declined 1.1%. However, this business also showed improving sales trends in the first quarter as organic revenue decline was narrower than 3.1% seen in the last quarter.

The U.S. Specialty Channels business declined 2.5% organically, while the North America Other business declined 6.1%.

Adjusted operating profit declined 8% in North America due to lower sales.

It should be noted that from the first quarter, the Kashi cereal and snacks businesses were shifted from the U.S. Morning Food and U.S. Snacks segments to the North America Other segment for reporting purposes

International: During the quarter, revenues in Europe improved 1% organically to $607 million driven by strong performance of the Pringles business. Asia Pacific increased 4% organically to $230 million helped by growth in the Asian business. Latin America also improved 15.7% to $295 million due to growth across the region.

Adjusted operating profit improved 12.8% in Europe and 5.2% in Latin America, while declining 3.2% in Asia Pacific.

2015 Guidance Re-Affirmed

In 2015, Kellogg expects a difficult macroeconomic environment as well as significant currency headwinds due to the devaluation of some foreign currencies.

Organic revenue growth is expected to remain flat in 2015.

Also, adjusted operating profit is expected to decline between 2% and 4%.

Adjusted earnings per share are expected in the range $3.74-$3.82, representing growth range of negative 2% to flat. The earnings guidance excludes the impact of currency as well as an extra week in 2014.

Both operating profit and earnings per share guidance, however, include a negative impact of 3 to 4 percentage points from changes in its incentive-based compensation plan for 2015.

Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader food and beverage sector include B&G Foods Inc. BGS , SUPERVALU Inc. SVU and The Hain Celestial Group, Inc. HAIN . While B&G Foods and SUPERVALU sport a Zacks Rank #1 (Strong Buy), The Hain Celestial Group carries a Zacks Rank #2 (Buy).

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HAIN CELESTIAL (HAIN): Free Stock Analysis Report

B&G FOODS CL-A (BGS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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