Credit: Shutterstock photoWe issued an updated research report on Kellogg CompanyK on Nov 13, 2015.
Kellogg delivered mixed third-quarter 2015 results on Nov 3, with earnings surpassing the Zacks Consensus Estimate but sales missing the same. However, both the metrics declined year over year due to significant negative Fx impact. Excluding Fx, earnings per share of 83 cents grew 2% as Project K savings, pricing gains and lower taxes partially offset the weak volumes and resetting of incentive compensation. Organic sales grew 1%, better than flat growth last quarter.
Kellogg has been struggling to boost sales over the past two years mainly due to weak performance of the developed market cereals and the U.S. snacks businesses as a result of lower demand. However, the company witnessed improved sales trends in 2015 backed by renovation, innovation and brand support funded by savings from Project K.
In order to improve sales performance, Kellogg is investing in brand building including digital media, consumer promotions and traditional advertising. It is also investing in in-store capabilities like increasing the sales forces of its struggling businesses - cereals and snacks. The company has launched campaigns supporting the breakfast occasion with increasing awareness about its importance as the first meal of the day.
Kellogg is also making aggressive efforts to improve its food items. It is 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.
Consumers now prefer food with more nutritional benefits, such as protein, gluten-free choices and simpler ingredients. The company is therefore re-positioning its key brands like Special K and Kashi as healthy lifestyle brands in line with the changing consumer attitude from dieting to health and wellness. In this regard, Kellogg launched protein and gluten-free versions of Special K and improved the existing Special K products. As a result, the brand witnessed improved trends in the second and third quarters. The re-positioning of the Kashi cereals brand in the U.S. is underway which should improve its sales trends in 2016.
It appears that these activities have started to show some results as cereal trends improved in 2015 so far.
Moreover, the Pringle purchase in 2012 from The Procter & Gamble Company PG proved to be a superb one. Pringles has performed well since the closure of the acquisition. It posted positive growth in all the regions in 2014 and continues to do well in 2015.
However, management expects the difficult macroeconomic environment and significant currency headwinds to persist in the rest of the year. With almost all foreign currencies deteriorating versus the U.S. dollar, of late, currency translations have been a significant headwind so far in 2015, thereby limiting revenue growth. Kellogg raised its currency headwind expectations for 2015 twice this year, which is a concern.
Amid the difficult macroeconomic environment, consumer constraints in the food industry and rising currency headwinds, it remains to be seen if Kellogg can sustain the improving sales trends in 2016.
Stocks to Consider
Kellogg has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the broader food and beverage sector are Omega Protein Corporation OME and B&G Foods Inc. BGS . Both the stocks sport a Zacks Rank #1 (Strong Buy).
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PROCTER & GAMBL (PG): Free Stock Analysis Report
B&G FOODS CL-A (BGS): Free Stock Analysis Report
KELLOGG CO (K): Free Stock Analysis Report
OMEGA PROTEIN (OME): 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.
