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Kellogg (K) Gains on Solid Brand Performance Amid Rising Costs

Kellogg Company K is benefiting from a solid product portfolio and brand identity. The convenience food maker is keen on expanding its business through acquisitions. These factors were seen in the second quarter of 2022, wherein the top and the bottom line surpassed the Zacks Consensus Estimate and increased year over year. Considering better-than-anticipated first-half results, underlying momentum and revenue growth management action Kellogg raised its 2022 view.

Yet, Kellogg is not immune to inflationary pressure and supply chain-related disruptions. Let’s delve deeper.

Zacks Investment Research
Zacks Investment Research


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Solid Performance & View

In the second quarter of 2022, Kellogg reported adjusted earnings of $1.18 per share that grew 3.5% year over year. On a constant currency or cc basis, adjusted earnings per share (EPS) jumped 7.9% to $1.23. The company reported net sales of $3,864 million, which advanced 8.7%. Net sales growth was backed by favorable price/mix and in-market momentum in snacks, noodles and other as well as international cereal and a faster-than-anticipated rebound across North America cereal. Organic net sales (excluding currency impact) increased by more than 12%.

For 2022, management now expects organic net sales growth to be up 7-8%, from nearly 4% growth expected earlier. The raised view reflects better-than-anticipated growth during the first half of the year, actions related to revenue growth management and impressive in-market momentum, especially in snacks and emerging markets. Adjusted operating profit is expected to rise 4-5% at cc, up from the previous view of 1-2% improvement at cc. Management expects adjusted earnings per share (EPS) to grow almost 2% at cc, up from prior guidance of 1-2% growth at cc. The view considers a better operating profit outlook.

What’s Working Well for Kellogg?

Kellogg’s portfolio consists of strong brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats, among many others. The company’s frozen foods brands like Morningstar Farms and Eggo have also been aiding growth. In its second-quarter earnings call, management highlighted that its world-class snacks brands continued to deliver robust performance across markets worldwide during this year. Pringles, which generates $2.5 billion of annual net sales worldwide, remains impressive. Cheez-It, with more than $1-billion annual net sales, continues to drive share gains in the cracker category in the United States and Canada. Other key brands, including Pop-Tarts and Rice Krispies Treats, are delivering solid performance.

Kellogg is dedicated to augmenting its portfolio through adding more products under existing brands, innovation and marketing initiatives. The company has been focused on investing in brand-building efforts. In this respect, it invests in digital media, consumer promotions and traditional advertising. Kellogg has also been enhancing its in-store capabilities like increasing the sales force of its struggling businesses.

In line with the strategy to diversify its organic offerings, Kellogg acquired protein bar maker, Chicago Bar Company, in 2017. Chicago Bar Company makes RXBAR, considered one of the fastest-growing nutrition bar brands in the United States. Additionally, the company’s Pringles buyout has been lucrative. Markedly, with the Pringles deal, Kellogg transformed itself from what was essentially a large U.S. snacks business to a true global snacks player. Kellogg also continues to expand its acquired brands through new product introductions.

Hurdles on Way

Kellogg is seeing adverse impacts of input cost inflation and supply disruptions. It has been battling a drab gross margin for a while, which persisted in the second quarter of 2022. The company’s adjusted gross margin came in at 32.4%, down from 34.2% reported in the year-ago quarter. Management expects input cost inflation to remain higher than productivity and RGM offsets. It also assumes no moderation in supply-chain bottlenecks and shortages until the fourth quarter of 2022.

During the quarter, Kellogg witnessed a 1.5% unfavorable impact from volumes, hurting its net sales to some extent. Volume remained pressured by supply-chain bottlenecks and shortages. In Europe, Latin America and AMEA regions, volumes were hurt by 2.5%, 5.5% and 4.4%, respectively.

That being said, we believe that this Zacks Rank #3 (Hold) company’s aforementioned upsides are likely to keep aiding growth. Shares of the company have increased 18.5% in the past six months compared with the industry’s growth of 3.3%.

Solid Food Bets

Some top-ranked stocks are The Chef's Warehouse CHEF, General Mills, Inc. GIS and United Natural Foods UNFI.

Chef’s Warehouse, a distributor of specialty food products in the United States, currently flaunts a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Chef Warehouse’s current financial-year sales suggests growth of 40.7%from the year-ago reported numbers.

United Natural Foods distributes natural, organic, specialty, produce and conventional grocery and non-food products. UNFI currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for UNFI’s current financial year sales suggests 7.6% growth from the year-ago period’s reported figures. United Natural Foods has a trailing four-quarter earnings surprise of 29.9%, on average.

General Mills, which manufactures and markets branded consumer foods worldwide, currently carries a Zacks Rank of 2. GIS has a trailing four-quarter earnings surprise of 6.5%, on average.

The Zacks Consensus Estimate for General Mills’ current financial year sales and EPS suggests growth of almost 2% and 1.5%, respectively, from the corresponding year-ago reported figures.


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