Kellogg CompanyK , the world's largest cereal maker, posted better-than-expected earnings in the fourth quarter of 2015 owing to improved cereal trends in the U.S. However, currency fluctuations pulled down revenues.
Fourth-quarter adjusted earnings of 79 cents per share declined 6% year over year due to significant currency headwinds.
However, earnings beat the Zacks Consensus Estimate of 75 cents by 5.3%. Excluding currency headwinds of 6 cents, earnings increased 1.2% year over year owing to improved cereal trends, pricing gains and productivity programs leading to savings.
Adjusted earnings exclude charges related to re-measurement of the Venezuelan business, acquisition-related integration costs, costs associated with Project K, a mark-to-market loss and certain other items. Including these items, the company reported loss of 12 cents per share, narrower than 82 cents loss in the prior-year quarter.
Kellogg reported revenues of $3.142 billion, which declined 10.6% year over year due to significant currency headwinds. Revenues missed the Zacks Consensus Estimate of $3.156 billion by 0.4%.
As Kellogg generates around 40% of net sales outside the U.S., a strong dollar lowered the value of international sales. With almost all foreign currencies deteriorating compared with the U.S. dollar, currency translations are posing a significant headwind in 2015, thereby limiting revenue growth.
Currency hurt sales by 10.1%. Acquisitions and dispositions had a positive impact of 0.5%, while an extra week last year negatively impacted 2015 sales by 5.2%. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) improved 4.2%, driven by organic growth in Europe, Latin America and Asia Pacific.
The company also witnessed improved sales trends in the U.S. in the fourth quarter, which boosted organic sales growth. After a difficult 2014, Kellogg witnessed improved sales trends, mainly in the U.S. business, backed by renovation, innovation, and brand support funded by savings from Project K.
Organic sales increase was better than an improvement of 1% seen in the previous quarter as price/mix gains offset lower volumes. Volumes declined 0.1%, narrower than 1.6% decline in the third quarter. On the other hand, price/mix added 4.3% to sales, better than 2.6% in the last quarter.
Kellogg's adjusted operating profit declined 4.9% to $440 million and increased 2.8% on a currency neutral basis due to the impact of resetting incentive compensation.
Profits declined in Europe and Asia/Pacific, but improved in North America and Latin America.
North America: North America sales declined 8% in the quarter. Organically, it was down 0.4% organically year over year to $2.15 billion as lower volumes offset price/mix gains. While volumes declined 1.3%, price/mix rose 0.9%.
Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, increased 1.5%, as a result of improving trends in the U.S. Cereal business.
We note that Kellogg's U.S. cereal business has slowed down since 2012 due to sluggish category growth resulting from lower demand. Competitive pressure from alternatives such as yogurt, eggs, bread and peanut butter are lowering the demand for cereals. Moreover, shift in consumer attitude from dieting to health and wellness is hurting the sales of Kellogg's weight management cereal brands, like Special K
To improve sales performance, Kellogg has launched campaigns supporting the breakfast occasion. The company is also investing in in-store capabilities, product and packaging innovation as well as reformulation of many existing products to drive demand.
Specifically, the company is completely redesigning the Special K brand (cereals and snacks) with plans to re-launch it as a healthy lifestyle brand in line with changing consumer trends. In this regard, the company launched a protein and a gluten-free version of Special K, while improving some of the existing products like Special K Red Berries and Special K Vanilla Almond.
These initiatives bore fruits as can be seen from improved cereal results in 2015, except for the third quarter where organic sales decline in the segment was wider than 2.3% in the previous quarter.
The U.S. Snacks businesses - struggling since 2013 due to weak volumes - declined 1.9%. The U.S. Specialty Channels business grew 1.5% organically, while the North America Other business went down 2%.
Adjusted operating profit increased 2.7% in North America due to improved cereal trend in the U.S.
International: During the quarter, revenues in Europe increased 1.6% on a constant currency basis to $645 million aided by growth in the Snacks business, including Pringles. Asia Pacific increased 3.3% on a currency neutral basis to $240 million helped by growth in the Asian business. Latin America also improved 45.3% to $287 million.
Adjusted operating profit (constant currency) declined 4.5% in Europe and 13.2% in Asia Pacific but grew 46.2% in Latin America.
Adjusted earnings of $3.53 per share declined 7.3% year over year in 2015 due to currency headwinds of 28 cents. However, earnings beat the Zacks Consensus Estimate of $3.50 by 0.9%.
Kellogg reported revenues of $13.525 billion, which declined 7.2% year over year due to significant currency headwinds. Revenue lagged the Zacks Consensus Estimate of $13.554 billion by 0.2%.
2016 Outlook Maintained
Kellogg continues to expect that it will meet previous currency-neutral guidance for net sales, operating profit, and earnings per share in 2016.
The company expects to achieve its long-term targets for sales and operating profit growth in 2016 - 1% to 3% in organic sales growth and 4% to 6% improvement in adjusted operating profit.
The company also anticipates constant currency adjusted earnings to grow in the range of 6% to 8%, which is slightly less than the long term target of 7% to 9%.
Stocks to Consider
Kellogg currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader food and beverage sector are Sysco Corp. SYY , Post Holdings, Inc. POST and Campbell Soup Co. CPB . All the three stocks have a Zacks Rank #2 (Buy).
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