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Kellogg (K) Chalks Out Cost-Cutting Plans, Lays Off 1000

Zacks Equity Research

Kellogg Company K has taken its cost-cutting plans a notch higher with the retrenchment of more than 1000 employees across several of its facilities in the U.S. Also, the company announced plans to close down several of its distribution centers as part of its efforts to shift to a warehouse distribution model. Kellogg already uses this system for its Pringles brand and in parts of its U.S. Snacks segment.

The company will no longer ship products directly to retail stores but will instead ship to retailers' warehouses. This move is an extension to its previously-announced efficiency and effectiveness program – Project K – and is expected to result in cost savings of around $125–$175 million. Kellogg now expects $600–$700 million in Project K cost savings through 2019 compared to the previous expectation of $425–$475 million through 2018.

Management is of the view that the new model will simplify the cost structure while driving growth and profits for the company and its retail partners.

Aggressive cost cutting has been a key strategy for Kellogg to boost growth in the face of tepid sales. Other food companies like General Mills Inc. GIS have also been struggling to grow sales over the past few years mainly due to lower demand. Kellogg reported revenues of $3.25 billion in the first quarter of 2017, reflecting a decrease of 4.1% year over year and marking the ninth straight quarter of a revenue decline.

Kellogg’s North America sales also dropped 4.2% in the last reported quarter. The North American food industry has seen sluggish growth and slowdown in consumption over the last few quarters owing to shift in consumer preference toward products with less artificial sweeteners, sodium and saturated fat along with changes in consumer dynamics (such as increased need for portable and on-the-go products).

In fact, over the past one year, Kellogg has lost 4.4%, wider than the Zacks categorized Food-Miscellaneous/Diversified industry’s decline of 0.6%. Estimates have also been trending downward for the current year and next over the last 60 days.

The company’s cost cuts have been of much significance till now. Project K generated savings of around $180 million in 2015. Through 2016, the company has saved approximately $300 million cumulatively. Along with Project K, the company has a zero-based budgeting program which is anticipated to generate $450–$500 million in savings over the 2016–2018 period. In 2016, the company saved $180 million, better than the projected range of $150–$180 million.

Zacks Rank & Stocks to Consider

Kellogg presently carries a Zacks Rank #4 (Sell). A few better-ranked stocks in the industry include Aramark ARMK and B&G Foods, Inc. BGS.

Both the companies carry a Zacks Rank #2 (Buy). Fiscal 2017 earnings for Aramark are expected to increase 13%, while that of B&G Foods are likely to rise 7.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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