Kellogg (K) Q2 Earnings: Cost Savings, Growth Efforts to Aid

Kellogg CompanyK is set to report second-quarter 2018 results on Aug 2, before the opening bell. In the last reported quarter, the company's earnings met the Zacks Consensus Estimate. It surpassed expectations in three of the trailing four quarters, delivering an average beat of 7.4%. Let's see how things are shaping up prior to the upcoming quarterly announcement.

Savings Initiatives Bode Well

Kellogg remains well on track with its four-year restructuring program - Project K. Savings generated from this program are being invested in brand-building initiatives, in-store execution, sales capabilities and innovation to drive sales. Part of the Project K savings is also being invested to improve its food quality. Additionally, the company plans to increase manufacturing capacity and R&D resources in developing/emerging markets. That said, Kellogg expects $600-$700 million in Project K cost savings through 2019, which bodes well for the quarter to be reported.

Further, the company expects to generate savings from its zero-based budgeting (ZBB) program. The ZBB program is anticipated to generate $450-$500 million over the three-year period 2016-2018. The company realized annual savings from the ZBB program of $397 million through 2017 and expects cumulative savings to be approximately $450 to $500 million by the end of 2018. The company also expects to reach a 17-18% currency-neutral comparable operating profit margin by 2020, driven by the ZBB program.

Markedly, Kellogg expects to realize more than half of the remaining Project K savings as well as the remaining Zero-Based Budgeting savings in 2018. These are also likely to drive second-quarter profitability.

Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company Price, Consensus and EPS Surprise | Kellogg Company Quote

Other Efforts to Drive Growth

Kellogg undertakes frequent acquisitions to strengthen its portfolio. This is evident from the buyouts of Chicago Bar Company and Pringles. In fact, Chicago Bar Company's renowned RXBAR is expected to contribute about 1-1.5% of sales growth in 2018. Also, Pringles, which is now the company's second-largest brand, is an important sales driver. Pringles grew at a double-digit rate in the first quarter of 2018.

Additionally, the company focuses on channeling funds toward product and packaging innovation as well as reformulation of many existing products to meet the rapidly changing views of consumers regarding health and wellness. Progressing on these lines, the company launched protein and gluten-free versions of Special K and improved some existing products under the Special K brand. Apart from Kellogg, other food companies like McCormick MKC , Mondelez MDLZ and TreeHouse Foods THS have been focusing on improving their organic and natural offerings to tap consumers' rising preference for such items.

Will its Efforts Offset Cereal & Snacks Business Challenges?

Kellogg's mainstay U.S. cereal business, which accounts for 40-45% of the sales, has been performing poorly for a while now. Lower demand for cereals due to competitive pressure from other breakfast alternatives has been hurting category growth. Additionally, such factors resulted in weak volumes in the company's U.S. snacks business.

Nevertheless, we expect that management's dedicated efforts to revive the business through investments in innovation and better in-store execution will aid in the long run. Further the company's savings and revenue boosting efforts are expected to offset the short-term deterrents.

On that note, let's take a look at the picture unveiled by the Zacks Consensus Estimate and the Zacks Model for the upcoming quarterly announcement.

Estimates Look Favorable

The company's strategic efforts to broaden its profitability and revenues are likely to fuel Kellogg's performance in the upcoming release. In fact, the Zacks Consensus Estimate for earnings for the second quarter is currently pegged at $1.04, depicting a rise of almost 7.2% from the prior-year quarter's figure. Further, estimates have remained stable over the past 30 days. Additionally, the Zacks Consensus Estimate for net revenues is currently pegged at $3,295 million, indicating a rise of roughly 3.4% from the prior-year quarter.

Zacks Model

Our proven model shows that Kellogg is likely to beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You may uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Kellogg's Earnings ESP of +0.36% combined with the company's Zacks Rank #3 make us reasonably confident of an earnings beat. You can see the complete list of today's Zacks #1 Rank stocks here .

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Kellogg Company (K): Free Stock Analysis Report

McCormick & Company, Incorporated (MKC): 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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