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Kellogg (K) New Cost Saving Plan Bodes Well, Sales Weak

Zacks Equity Research

On Mar 6, we issued an updated research report on cereal and snack maker Kellogg Company K.

Initiatives to Drive Growth

Kellogg boasts a legacy of over 100 years built on product portfolio strength and brand identity in both cereals and snacks. Popular Kellogg’s brands include Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Murray, Austin, Morningstar Farms, Famous Amos, Ready Crust and Kashi. In Jun 2012, the company acquired Procter & Gamble’s snack unit, Pringles, which is now its second-largest brand.

Last month, Kellogg posted an earnings and revenue beat in the fourth quarter of 2016 on robust cost savings and higher demand for its snack products in the U.S., an improvement from the flat to negative sales growth seen in the past few quarters. Growth in the U.S. snacks and specialty more than offset the persistent decline in cereal.

Meanwhile, the company announced an extension to its previously-announced efficiency and effectiveness program ("Project K") last month. Kellogg is changing the way it distributes products under the U.S. snacks business. The company will no longer ship products directly to retail stores but will instead ship to retailers' warehouses. This is expected to increase Project K cost savings by $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.

The company also initiated an aggressive zero-based budgeting (ZBB) program in 2015 in its North American business to generate savings in addition to that from Project K. We believe Kellogg’s accelerated margin improvement goal and ZBB savings target should drive profits.

Meanwhile, the company is expected to post reasonable earnings growth with the current growth estimate being 5.6% for 2017. Additionally, the stock’s long-term earnings growth rate of 6.69% and a VGM Score of “A” reflect its inherent strength.


Kellogg has been struggling to grow sales over the past two years mainly due to weak performance of its developed markets cereals and the U.S. snacks businesses as a result of lower demand.

In 2016, the company’s net sales decreased by 3.8% primarily due to the negative impact of foreign currency translation. As Kellogg generates around 35% of its net sales outside the U.S., it is exposed to major currency headwinds.

Again, excluding the extraordinary inflationary gains in Venezuela, Kellogg’s organic sales declined 1.1% in 2016 due to persistent weakness in North America and Europe. North America core sales declined 1.7% in 2016 due to soft U.S. cereals and snack sales. Sales in Europe and Latin America also declined 4.8% and 23.1%, respectively.

Meanwhile, the company’s shares have been trading below the broader Zacks categorized Food-Miscellaneous/Diversified industry in the last six-month period. The stock has lost 7.2% in the period, compared to the 3.2% drop of the broader market. Estimates have moved down slightly for the current year and the next over the last 30 days.


Zacks Rank & Key Picks

Kellogg carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Better-ranked stocks in the consumer staples sector include Unilever PLC UL, Unilever N.V. UN and Ingredion Incorporated INGR, all carrying a Zacks Rank #2 (Buy).

For full-year 2017, Unilever PLC’s EPS is expected to grow 8.7% while that for Unilever N.V. is estimated at 3.9%.

Meanwhile, Ingredion has a decent earnings surprise history, beating the Zacks Consensus Estimate in all of the last four quarters, the average being 10.36%.

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Unilever PLC (UL): Free Stock Analysis Report
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