Kellogg (K) Benefits From EMEA Region, High Costs a Worry
Kellogg Company K has been benefiting from its robust brand portfolio due to innovation and prudent buyouts. Strength in the company’s snacks business and the EMEA has been aiding it, in particular. These upsides boosted the company’s sales in the first quarter of 2022 and also led to a raised organic sales guidance for the full year. That said, elevated costs and current headwinds in the North America cereal business are concerns. Also, a deceleration in at-home demand is a downside.
Let’s take a closer look.
Factors Working Well for Kellogg
The EMEA has a multi-year track record of organic net sales growth for Kellogg. In the first quarter of 2022, the EMEA saw organic sales growth of 17% and a double-digit rise in net sales and operating profit. This was backed by the company’s revenue growth management, especially for price realization. The company witnessed net sales growth in the snacks, cereal and noodles categories. Noodles remained the biggest contributor, while the snacks improvement was led by Pringles.
Kellogg is dedicated to augmenting its portfolio by adding more products under existing brands, innovation and marketing initiatives. K has been focused on investing in brand-building efforts. In this respect, it invests in digital media, consumer promotions and traditional advertising. Additionally, the company’s prudent acquisitions have been yielding favorably. Kellogg acquired the protein bar maker, Chicago Bar Company, in 2017. Chicago Bar Company makes RXBAR, which is considered one of the fastest-growing nutrition bar brands in the United States. Additionally, the company’s Pringles buyout (concluded in May 2012) has been lucrative. Apart from this, the consolidation of Multipro (completed in May 2018), a Nigerian food distributor, has been yielding. Markedly, these acquired businesses are expected to continue supporting the company’s business. Gains from Pringles and Multipro were well-reflected in first-quarter sales.
The company reported first-quarter 2022 net sales of $3,672 million, which advanced 2.4% year over year and surpassed the consensus mark of $3,582 million. Organic net sales increased 4.2%. The robust performance was backed by strength in snacks brands across all four regions and a favorable price mix stemming from the company’s revenue growth management. Based on its first-quarter performance, changes in the operating landscape and underlying trends, management updated its full-year 2022 organic net sales guidance. Organic net sales growth in 2022 is estimated to be up nearly 4% now from the around 3% growth expected earlier. The raised guidance reflects strong business momentum, especially in snacks globally and noodles in Africa. Also, an elevated price/mix is likely to be a driver, which is much needed to counter the additional cost inflation.
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Key Concerns
Kellogg’s first-quarter performance was somewhat hurt by the inadequate finished goods inventory in North America cereal stemming from a fire outbreak and a labor strike in the second half of 2021. Sales in the North America segment amounted to $2,109 million, declining 0.9% year over year. The downside was caused by soft volumes due to lapping robust two-year comparisons, as well as supply hurdles mainly related to cereal inventory, resulting from the abovementioned fire and labor strike. The company is progressing well toward reviving sales and inventory in its North America cereal business.
In the first quarter of 2022, Kellogg’s gross profit of $1,122 million declined from the $1,191 million reported in the year-ago quarter. The downside stemmed from supply bottlenecks and the impacts of the fire and the strike witnessed in the second half of last year. The effect included lost sales and escalated costs. Apart from this, economy-wide constraints and shortages affected the gross margin and are likely to persist, at least through the first half of the year. Additionally, an adverse mix was a factor. Due to a lower gross profit, as well as tough year-over-year comparisons, the adjusted operating profit fell 4.3% to $476 million, while the same declined 2.4% to $485 million at constant currency.
However, Kellogg remains on track with its productivity and revenue growth management actions to counter cost headwinds. This Zacks Rank #3 (Hold) company’s shares have risen 14% in the past three months compared with the industry’s growth of 3.8%.
3 Solid Staple Stocks
Some better-ranked stocks are Pilgrim’s Pride PPC, Sysco Corporation SYY and Medifast MED.
Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, sports a Zacks Rank #1 (Strong Buy). Pilgrim’s Pride has a trailing four-quarter earnings surprise of 31.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for PPC’s current financial-year earnings per share (EPS) suggests growth of almost 43% from the year-ago reported number.
Sysco, which engages in marketing and distributing various food and related products, carries a Zacks Rank #2 (Buy). Sysco has a trailing four-quarter earnings surprise of 9.1%, on average.
The Zacks Consensus Estimate for SYY’s current financial-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.
Medifast, which manufactures and distributes weight loss, weight management, healthy living products and other consumable health and nutritional products, currently carries a Zacks Rank #2. Medifast has a trailing four-quarter earnings surprise of 12.9%, on average.
The Zacks Consensus Estimate for MED’s current financial-year sales and EPS suggests growth of almost 19% and 13.4%, respectively, from the year-ago reported figure.
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